Abstract :We study how an intense localized conflict affects economic activity and welfare across regions through disruption and reorganization of production networks. We develop new sufficient statistics for a shock's effects on welfare based on the observed changes in production networks without relying on their microfoundation. We apply our framework to analyze the effects of the 2014 Russia-Ukraine conflict using unique firm-to-firm railway shipment data within Ukraine. Our reduced-form evidence reveals that firms outside the conflict areas face substantial disruption in production and trade, and these firms reorganize their supplier and buyer linkages as a response. Our sufficient statistics results reveal that regions with greater supplier and buyer exposures to the conflict areas faced a faster decline in welfare, accounting for a 17% reduction in welfare for an average region relative to those without exposures. This empirical evidence provides insight into why localized conflicts within a country or region often have far-reaching detrimental consequences for the broader economy.

Short Bio :Vasily Korovkin is an Assistant Professor at Universitat Pompeu Fabra. He was also an Assistant Professor at CERGE-EI before. He received his B.Sc. in Economics from Moscow State University, his M.A. degree from the New Economic School in Moscow, and his Ph.D. in Global Economics and Management from the UCLA Anderson School of Management. His main research interests are in development economics and political economy, but also in international trade.