region analyses. Not surprisingly, past research often finds civil wars and political crises to have a negative economic cost, particularly in the short run. For example, Cerra and Saxena (2008) estimate that on average, output contracts by 18% immediately following civil wars in a cross section of 190 countries. Abadie and Gardeazabal (2003) study terrorist activities in the Basque country and find a 10 percent gap between GDP per capita in Basque and a comparable “synthetic” region.

Though informative, macroeconomic studies by nature are unable to address heterogeneity associated with individual conflicts and the differential impact of conflict on different groups within a country/region. More studies are now adding evidence at the micro level, but due to data constraints, most of this research focuses on analyses at the household level and on human capital outcomes such as health and education attainment.<sup>5</sup> Studies on the links between firms’ output and remain scarce.

Early papers on firm outcomes use stock market returns to get around data limitations. For example, Abadie and Gardeazabal (2003) analyze how the cease-fire declared by the Basque terrorist organization ETA in 1998-1999 affects the returns of firms operating in the Basque Country relative to other firms. They find that the truce announcement led to excess returns of firms operating in the region while its end led to a small negative impact on their returns, suggesting a negative impact of terrorism on expected investment returns. Similarly, Guidolin and La Ferrara (2007) study the market’s response by diamond mining firms to the sudden end of the Angolan civil war in 2002. In contrast to Abadie and Gardeazabal, they find that diamond companies with concessions in Angola saw a drop of seven percentage points in market returns compared to otherwise similar firms that held no concessions there. The intuition is that conflicts can be beneficial or harmful to businesses depending on the institutional arrangements where they operate. In Angola, conflicts might have been beneficial to incumbent diamond firms because they helped deter entry and make profitable unofficial dealings easier.

One concern with the above approach is that stock market data are typically not available in countries impacted by civil wars. More recently, Collier and Duponchel (2010) use survey data to investigate some channels through which conflicts can affect firm performance in the context of Sierra Leone’s civil war. They propose that one channel in which wars can have persistent post-conflict effects on firms is through technical regress and loss of workers’ skills. The prediction is supported by the result that 5 years after the war ends, firms were more likely to report willingness to pay for staff training in those areas most affected by the conflict, indicating a shortage of skilled labor. A lack of more detailed data prevents Collier and Duponchel from confirming this result since it is not possible to determine the substitutability between labor and capital at the firm level. Moreover, they only have data after the war so they do no have a “control” period. Hence, there are concerns with omitted unobserved factors as high intensity regions might have intrinsic characteristics that make them more prone to conflicts _and_ also affect the operating environments of firms. Collier

> 5See Blattman and Miguel (2010) for a broader literature survey.

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