Abstract
We provide evidence about the mechanisms linking resource-related income shocks to conflict. To do so, we combine temporal variation in international drug prices with new data on spatial variation in opium suitability. We find a conflict-reducing effect of higher drug prices over the 2002-2014 period, both in a reduced-form setting and using instrumental variables. There are two main mechanisms. First, we highlight the role of opportunity costs by showing that opium profitability positively affects household living standards. Second, by using data on the drug production process, ethnic homelands, and Taliban versus pro-government influence, we show that, on average, opportunity cost effects dominate contest effects. Contest effects depend on the degree of group competition over valuable resources. The conflict-reducing effect of higher prices is higher in areas that are more plausibly dominated by one group.
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