We investigate how externalities and cooperation affect nations’ efforts to counter transnational terrorism activities. Our model captures three factors whose interplay determines counterterrorism (CT) efforts and terrorist activity: the size of the spillover effect, the degree of internalization of the externality, and whether nations’ CT efforts have an asymmetric or symmetric effect on the security of other nations. In our symmetric model, preemptive CT efforts and terrorist activities decrease with the size of the externality regardless of the degree of cooperation between nations. In our asymmetric model, as the externality of the "smaller" nation increases, the "larger" nations reduce their efforts, and the smaller nation reacts by increasing its own efforts. We also investigate coalition stability and show that (a) in the preemptive case, the full coalition is not stable and partial coalitions are stable for sufficiently small externalities; and (b) in the defensive, symmetric case, only the full coalition is stable.