This chapter analyzes dynamics of conflict in Bihar and Jharkand, and explores patterns which shape governance policies, especially in terms of political economy. The author claims that all actors involved in the conflict have the power to exercise a strategic veto, however they cannot structure the outcomes. Naxals on the one side, and state actors on the other, can exercise a strategic veto on each other’s operational activities and at the same time they limit each other in terms of policies pursued. However, the state can exercise more power in this case, as it sets terms of engagement. Prakash highlights the importance of the distribution of developmental benefits and claims that they play a central role in protracting the Naxal conflict. In order to break out of this perpetuation of the conflict, local institutions have to be strengthened, especially in terms of their ability to prioritise issues that they deem important, argues Prakash.