Terrorist Attacks and Strategic Consumption

Abstract

Using a large representative sample of bank card transactions, this paper examines the impact of terrorist attacks on the household consumption structure choice between credit versus debit accounts. Compared with the baseline period, we document a daily increase of 0.19% more in the fraction of credit card spending out of total card spending for the attack-hit-city consumers than the non-attack-hit city consumers during the three weeks on and after the terrorist attacks. The incremental credit card usage is stronger for consumers who reside close to the attack location and after the attack events with severe outcomes. Consistent with the strategic choice mechanism, the consumption structure adjustment is immediate while not persistent. The adjustment concentrates among consumers with high liquidity constraints, high revolving credit card debt, unstable cash flows, and when the costs of using credit accounts are anticipated in the further future. The adjustment derives from a shift of debit account spending towards credit account spending, and consumers without credit cards do not significantly change their spending. We also document an increase in investments upon the terrorist attacks, driven by the lower-risk savings-related investments. The increased credit card spending ratio manifests in discretionary goods. Overall, our study highlights the real economic impact of terrorist attacks on household consumption through the strategic choice under economic uncertainty.