Uncertainty, Peace, and Investment: Evidence from Credit Microdata in Colombia

We study the causal effect of the formal cessation of conflict on investment. Our difference-in-difference strategy combines the 2016 peace agreement between the Colombian government and the FARC insurgency with pre-existing differences in FARC exposure across municipali-ties. Using administrative data from a large bank serving agricultural producers, we document a sizable increase in business credit in FARC municipalities after the peace deal is finalized. Higher loan applications for long-term investments drive this increase, without any change in supply-side factors. Investment only increases in municipalities located close to markets and does not increase during the peace negotiations, despite a meaningful decline in violence. This indicates that uncertainty is a major deterrent for investment and that peace is complementary to market access. There is no change in loan misuse or delinquency, which suggests that the new loans correspond to profitable projects. Higher night-time luminosity provides further evidence of an economic peace dividend.