DP16984 The Economic Costs of Conflict: A Production Network Approach
A novel approach is presented for estimating the economic costs of conflict, in which the production network serves a first-order mechanism through which the disruptive effect of localized conflict spreads to firms in peaceful areas. The method is applied to the Maoist insurgency in Eastern India during the period 2000-2009. We document the negative impact of conflict on firms' behavior, which spreads to firms in peaceful areas through input-output connections. We then apply a model of production networks in order to quantify the overall impact of conflict by taking these propagation effects into account. We find that the Maoist insurgency results in an average aggregate output loss of 3.8 billion USD per year. Interestingly, 73% of the loss is explained by network propagation.