Does credit availability mitigate domestic conflict?

This paper establishes that lack of credit is one of the root causes of conflict; with credit being scarce, productive endeavours are less attractive and conflict-led activities more appealing at the margin. Our investigation contributes to the literature which predominantly focused on the role of income and income inequality for conflict incidence, but not credit availability in particular. A theoretical framework is developed with endogenous occupation choices, demonstrating that more credit mitigates conflict, especially for developing countries. The empirical analysis uses novel instruments focusing on heterogeneous land reform implementations and their cumulative impact. Using data from 143 countries over the period 1960–2010, there is robust evidence that the conflict incidence is decreasing in credit availability, especially for the pro-poor land reforms and land reforms subsuming land ceiling, expropriation and redistributive type motives. Thus, policies focusing on ease of credit will be beneficial in mitigating civil strife, particularly for developing countries.