Economic Development in the Shadow of War

Marcel Schlepper and Timo Wochner

No 12915, CESifo Working Paper Series from CESifo

Abstract: This paper provides causal evidence that the mere risk of war — absent actual conflict — imposes substantial economic costs. Our setting exploits NATO's Cold War defense line against a potential Soviet invasion, which created a geographic discontinuity in war risk within West Germany. A leak of classified defense plans in 1977 made this discontinuity salient to the public. We show that war risk distorted firm behavior on the exposed side of the defense line: firm entry declined, and incumbent firms reduced investment. These responses caused persistent regional divergence. Decades after the Cold War ended, incomes remain significantly lower in areas once exposed to higher war risk.

Keywords: war risk; conflict; economic growth; firm decisions (search for similar items in EconPapers)
JEL-codes: D74 O12 R11 (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_12915

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