When fear disrupts growth: Modeling the economic toll of terror on tourism

This paper develops a dynamic Ramsey-Cass-Koopmans (RCK) model to analyse the macroeconomic impact of terrorism-induced fear on tourism and growth. We introduce a behavioural mechanism where households’ utility from tourism consumption is distorted by a time-varying security perception index, θ ( t ) , which declines following terrorist attacks. This fear channel reduces savings and investment, slowing capital accumulation and long-run growth. Our model also incorporates government intervention through public safety investment aimed at restoring confidence. We evaluate three scenarios: (i) one-time shock; (ii) persistent fear; and (iii) policy-driven recovery, and simulate their effects on capital, consumption, and welfare. Our results show that persistent fear leads to the greatest welfare loss, while rapid policy-driven recovery can paradoxically destabilize investment if not properly calibrated. Our paper highlights the trade-offs in post-terrorism policy design and offers new theoretical insights into how behavioural responses to insecurity can shape macroeconomic trajectories in tourism-dependent economies.