# **1. Introduction**

To what extent do economic conditions affect the risk and the intensity of civil conflicts? This is one of the most pressing questions in the economics of conflict (Blattman and Miguel, 2010). Much of the recent literature has used changes in international commodity prices to credibly address this question (e.g. Dube and Vargas, 2013; Bruckner and Ciccone, 2010; Bazzi and Blattman, 2014). However the direction of the effects of economic shocks on conflict is contentious. On the one hand, a positive shock may reduce the conflict risk by increasing the opportunity cost of individuals to rebel and/or by increasing the state’s ability to repress or buy off rebels (Fearon and Laitin, 2003). On the other hand, a positive shock to a country’s resources (e.g. oil discovery) could also raise the value of the state’s control to fight over (the so-called ‘rapacity’ hypothesis). Disentangling these channels is difficult, which may help explain the lack of consensus of the cross-country evidence on the effects of international commodity prices on conflict (e.g. Bruckner and Ciccone, 2010; Bazzi and Blattman, 2014; Calì and Muladbic, 2014). In addition, international prices usually allow us to examine only a relatively small portion of households’ production and may only partly transmit to domestic price changes, which are the ones affecting households’ income.

Our paper tries to address both issues by examining the relationship between income shocks and conflict across Nigerian states over the past decade. We use an innovative empirical strategy matching household survey, oil production and domestic and international price data to capture three separate channels linking income changes (i.e. household consumption, household production and natural resources wealth) to conflict.<sup>1</sup> In this way, the paper contributes to the empirical literature exploiting the variation across subnational units to identify the effects of exogenous income shocks on conflict (e.g. Dube and Vargas, 2013; Berman and Couttenier, 2014; Maystadt and Ecker, 2014).

Our strategy allows us to make a number of contributions to the literature. First, to the best of our knowledge this is the first paper that measures the effect of price changes on conflict via consumption.<sup>2</sup> We do so by constructing a consumption price index based on exogenous price movements of various goods weighted by their importance in household expenditures at the beginning of the period. Price increases of consumed items turn out to have a significant conflictinducing effect in Nigeria. In fact, we show that failure to include this consumption impact severely biases (towards zero) the conflict-reducing effect of price increase of produced agricultural commodities. That is an important finding as the literature tends to focus only on the effects of prices of produced goods on conflict.

Second, we add to the evidence distinguishing between the effects of changes in prices of agricultural commodities, which are labor intensive diffused commodities, and prices of pointsource capital intensive oil. While Dube and Vargas (2013) focus on the case of exported

> 1 In this paper, conflict is defined as the occurrence of various forms of political violence (i.e. battles between the state and armed groups, protests/riots, violence against civilians).

> 2 Some papers have tried to model these effects by using international commodity prices weighted by the commodity’s share in the imports basket (Arezki and Brückner, 2011; Calì and Muladbic, 2014; Maystadt, Trinh Tan and Breisinger, 2014). However as Bazzi and Blattman (2014) noted these import weights are likely to be more of a reflection of purchases by firms, elites, and governments than actual household consumption.

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