We consider a game played by a state sponsor of terrorism, a terrorist group, and the target of terrorist attacks. The sponsoring
state wishes to see as much damage inflicted on the target of attack as possible, but wishes to avoid retaliation. To do so,
his relationship with the terrorist group must remain ambiguous. The target of attack, for his part, wishes to bring these
attacks to an end as quickly as possible and will consider the option of retaliating against the sponsor to do so. We approach
the problem by introducing an �evidence� variable in a dynamic setting. We show that the interplay of different strategic
and non-strategic effects boils down to three qualitatively different scenarios, determined by key parameters. Based on this
result, two alternative instruments to retaliation are identified in order to resist terrorist activities. First, assuming
that the target is able to change some parameters by monetary investments, the paper provides an economic analysis of how
to invest optimally in order to make the sponsor lose incentives to support the terrorist group. Second, we propose changing
the structure of the game. Here, the key insight is that the target country can make a unilateral statement as to his strategy.
The sponsor cannot do so as he is in fact claiming that there is no cooperation with terrorist groups. While our discussion,
in this article, is motivated by an important problem in contemporary counterterrorism policy, it applies more generally to
the study of secret coalitions.
Keywords: Secret Coalitions, Security Economics, Noncooperative Games