Firm Exit and Armed Conflict in Colombia

Abstract

This paper uses two unique panel data sets to study the causal effect that armed conflict has over entrepreneurial activity in Colombia. Using a fixed effect estimation methodology at the plant level and controlling for the possible endogeneity of armed conflict through the use of instrumental variables, we find that a one standard deviation in the number of guerrilla and paramilitary attacks in a municipality increases the probability of firm exit in 8.1 percentage points. This effect is stronger for smaller plants and has a differential impact with respect to firms' age