Making Do With What You Have: Conflict, Input Misallocation and Firm Performance

Abstract

This article investigates whether conflict induces distortions in the functioning and accessibility of markets for production inputs and in their allocation among firms. We study firm operations and outcomes in the context of Palestine during the Second Intifada. We analyse input usage over time across districts experiencing differential changes in conflict intensity. Conflict induces firms to substitute domestically produced materials for imported ones. Counterfactual analyses show that this mechanism can account for more than 70% of the fall in the output value of firms in high conflict districts.