and Duponchel (2010) use distance to Monrovia (Liberia) to instrument for conflict intensity but distance is a problematic instrument because it can also directly affect output and productivity.

One approach is to find an exogenous event. Ksoll et al. (2010) examine the impact of unexpected violence during the 2007 Kenyan general election on exports by flower firms. The advantage of this paper is a cleaner identification strategy since violence shocks were unexpected and did not equally affect all regions where the firms were located. Thus Ksoll et al. are able to construct appropriate counterfactuals and estimate the reduced form impact of violence on exports more reliably. They find that violence in this period leads to a 38% drop in export volumes. Detailed survey data allow them to further develop and estimate a structural model with endogenous labor supply. Simulations results show a 16% increase in operating cost if firms were to induce workers to work overtime to compensate for workers’ absence caused by fear of violence.

The external validity of these results is unclear. Ksoll et al.’s work is based on a small sample size and it focuses on a highly specialized industry which is likely very different from the rest of the economy. The only paper we are aware of that uses census data is Camacho and Rodriguez (2010). These authors use instrumental variables approaches in models with fixed effects to assess the impact of armed conflicts on the exit of manufacturing firms in Colombia. They find that a one standard deviation increase in the number of attacks (by region) results in a 5.2 percentage point increase in the firms’ exit rate. Exit mechanisms however, are left unexplored in the paper. To the best of our knowledge, our paper is the first to study the evolution of firms’ productivity in a conflict context. As such, it also contributes to the growing literature that examines productivity growth in developing countries. A paper closely related to our research is Hallward-Dremeier and Rjikers (2011), who study the relationship between firm survival and productivity before and after the 1997 financial crisis in Indonesia and find an attenuated impact of productivity on firms’ exit during the crisis. Among other explanations, Hallward-Dremeier and Rjikers suggest that regime change and political connectedness might be determinants of this attenuation, based on the premise that firms affiliated with the Suharto regime might have been hurt disproportionally and were more productive before the crisis. However, firms might have appeared productive as a result of connectedness or as a result of real technical efficiency. Hallward-Dremeier and Rjikers mention but do not attempt to disentangle these two possible effects.

# **4 Methodology**

There are various mechanisms through which conflict could impact individual firms. The most obvious channel is through its effect on both factors of production, capital and labor: buildings and machinery might be damaged or stolen, people might die, get injured, migrate out of fear of violence or simply unable to show up at work. Destruction of capital and labor, if on a sufficiently large scale, will likely alter both their marginal product and marginal cost.

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