ABSTRACT
We develop a novel approach to estimate the economic cost of conflict, where the production network is a first-order mechanism through which the disruptive effect of localized conflict propagates to firms in peaceful areas. We apply our method to study the effects the Maoist insurgency, during 2000-2009. We document the existence of a negative impact of conflict on firms’ behavior, which spreads towards peaceful areas through input-output linkages. We then apply a model of production network to quantify the overall impact of conflict by taking these propagation effects into account. We find that the Maoist insurgency resulted in a yearly aggregate output loss of 4.5 billion USD. Quite remarkably, 73% of this loss is explained by network propagation.