In four essays, this dissertation explores the process of peace consolidation and economic recovery from the devastating conflict of 1983-2009 in Sri Lanka. This dissertation addresses a timely and important topic. The findings make an important contribution to the literature on economic development and peacebuilding, specifically on the role of foreign aid in alleviating the risks of conflict and helping countries rebuild their economies after conflict. The dissertation highlights important political economy dimensions that help illustrate social and political dynamics that lead to conflict, such as regional and ethnic inequalities, which also influence post-conflict reconstruction. In addition to a historical background chapter, the dissertation comprises three empirical essays. The first empirical essay on the role of aid on peace consolidation investigates the geolocations of aid projects within Sri Lanka using mixed methods of GIS and econometric analysis. The study finds that donors do not respond to the needs of the recipient country. The second empirical essay on state capacity building uses tax effort as a proxy for state capacity and explores the perception of the government by marginalized groups. The essay finds that the Sri Lankan post-conflict state cannot be characterized as a capable state along the tax mobilization dimension and that the perception of the government is negative. Lastly, the third empirical essay on remittances and internally displaced persons examines whether remittance receivers become wealthier over time in post-conflict settings and whether internally displaced persons (IDPs) spend their remittances more on consumption than on asset accumulation relative to non-IDPs receiving remittances. The results show that remittances are primarily used for everyday survival needs or for accumulating consumer goods by the conflict/disaster survivors. The implication deducted from this dissertation is that ethnic and economic reconciliation has not been prioritized in Sri Lanka following the end of the war. Because of that, peace consolidation is fragile, and the country will most likely see conflict in the near future.