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Poverty alleviation has become one of the main global agendas of the twenty first century, but the identification and targeting of the poor is facing fundamental problems due to the lack of required information. We utilize the micro-level estimation technique to estimate household expenditure for the census households using Nepalese household surveys, and estimate different measures of poverty and inequality at the national level as well as at the regional, districts and village levels, and for the different caste/ethnic groups. Our findings indicate that the reduction in poverty during 1995/96 – 2003/04 is not uniform across the villages of Nepal, and the level of poverty actually went up in a significant part of the country. The intensity of inequality went up significantly during the study period, where enterprise income and remittances contributed the most. Using public choice theory of conflict, we test the effect of inequality and poverty on the intensity of Nepal’s conflicts due to the Maoist’s People’s War. We take into account the heterogeneity among the districts of Nepal and hierarchical nature of the data

by introducing multi-level models. The increased poverty accompanied by the accelerating inequality throughout the country has compounded the divide between the haves and the have-nots and provided a suitable atmosphere for the conflict. The results show that higher inequality and poverty escalate the deadly violence while the presence of social network and the government welfare programs reduces it. An economic variable, such as employment, however, has no effect on the level of conflict indicating that Nepal’s conflict is rooted in the age-old grievances and inequality. Finally, we test the implication of the full consumption insurance hypotheses in the presence of violent conflict that household consumption should not be affected by the idiosyncratic shocks. We find that food consumption suffers the most from the violence related shocks. The level of food consumption vulnerability is more pronounced for the households with low levels of education and income, but the socially disadvantaged caste/ethnicity is not appeared as a significant factor of food-consumption vulnerability.