Nicolas Polasek

About half of forcibly displaced people worldwide are hosted in rural communities, where integration with external markets is often limited. This paper studies how market integration shapes host communities' responses to internal displacement in Ethiopia, where conflict displaced more than four million people between 2018 and 2022. I develop a stylized framework in which hosts produce and consume food, traded on external markets, and services that are locally supplied. Displacement expands consumer demand and low-skill labor supply, inducing hosts to enter high-skill occupations. In the framework, lower market integration limits host reallocation and causes food prices to decline. The empirical analysis instruments displacement inflows with a shift-share design that combines the origins of an area’s pre-existing displaced population with subsequent conflict shocks in those origins. Displacement inflows cause a decline in low-skill wages and non-food prices. However, adjustment depends on market integration. In more integrated communities, hosts move out of agriculture and casual labor into higher-skill, non-agricultural occupations. In less integrated communities, occupational reallocation is limited. Instead, hosts hire more workers and expand agricultural production, leading food prices to decline more sharply. Host real consumption rises in both types of communities, with larger gains in less integrated areas. These findings suggest that displacement can increase host consumption through lower labor costs, with market integration shaping how communities adjust.