This study has been motivated by the startling variation routinely observed in the performance of local governments within conflict-afflicted states. While institutional, social capital, modernization, and political party theories account for some of this variation, they ultimately fall short of fully explaining it. In response to the absence of a comprehensive explanatory framework for the varying levels of success states exhibit with local state-building in the aftermath of internal wars, this study advances a political economy approach, which views political performance as a product of state-business interaction. The proposed explanatory framework combines elements of economic structure and human agency to trace the emergence of alternative types of business political action and patterns of state-business relations, and to assess their impact on the performance of political institutions. Confirmatory analysis is based on extensive primary and secondary data collected through field research conducted in Bosnia and Herzegovina over the 2013-2015 period. Using this data, the study longitudinally assesses and compares the post-conflict performance of eight local governments, organized in pairs of counterfactuals. Congruence-testing employed to account for the uncovered variation between units of analysis grants limited support to the explanatory power of ‘usual suspect’ variables, including ethnic diversity, socio-economic development, wartime violence, and civic activism. Instead, process-tracing analysis supports the proposed theoretical framework, highlighting economic structure and business agency as causal factors of state-business relations and subsequently, government performance. The study finds that local government performance in post-conflict Bosnia was largely shaped by the capacity of businesses to cooperate first with one another, and then with the local state to tackle development and governance concerns. It also shows that the propensity of businesses to associationalism and their ability to overcome collective action problems was determined by and conditioned upon municipal structures of production. Finally, the study demonstrates that factors internal to business associations – specifically, their degree of ‘democraticness’ and professionalization - shaped both their capacity to exert influence on political actors and determined the nature and direction of this influence on local government institutions.