|Ph.D Student||Sharon Teitler Regev|
|Subject||Risks and Their Impact on Tourism|
|Department||Department of Industrial Engineering and Management||Supervisor||Dr. Bental Benjamin|
|Full Thesis text|
Tourism is very sensitive to the occurrence of terror attacks. This stands in stark contrast to the extremely low probability of getting hurt in an act of terror. The apparent high sensitivity of tourism to risk seems to be inconsistent with the attitude towards other risky events such as car accidents. The study suggests that the high sensitivity of tourists to acts of terror is due to substitution effects among tourism destinations rather than risk aversion. The quantitative impact of both factors is assessed by estimating the parameters of a theory-driven choice model. In this model the potential tourist chooses how to allocate his or her income between an all-purpose good and a composite tourism good. The latter is composed of various destinations, characterized among other things by their probability of undergoing an act of terror. The occurrence of such an act has an adverse effect on the utility derived from a visit to the respective destination. To estimate the model's parameters, it is assumed that each of the nine most important tourist-generating countries is populated by a representative household whose choices are generated in accordance with the model. The estimated parameters maximize the fit of the model's predictions on per-capita visits to various destinations to the observed pattern.
The estimated elasticity of substitution ranges between 2 and 11, depending on the exact model specification. The coefficient of relative risk aversion is about zero.
This implies that the high sensitivity of tourism to terror attacks is due to the high rate of substitution among the destinations rather than to high risk aversion.
The estimated parameters were used to analyze a series of counterfactual scenarios. For example, in a scenario that separates Israel from the composite terror-stricken destination, a 10% increase in the probability of a terror attack in the latter destination causes tourism there to drop by 20%, while Israel enjoys a small spill-over effect amounting to a 2%.increase in tourism. Interestingly, tourism to the composite terror-free destination is not affected.
On the normative side, the model implies that the welfare loss of an American representative household resulting from a 10% increase in the probability of encountering a terror attack in the composite terror-stricken destination is equivalent to about 0.2% loss in U.S. GDP. On the other hand, the loss of the terror-stricken destination countries due to the same increase in terror probabilities may reach up to 4% of GDP.