We exploit historical data on planned highways, railroads, and exploration routes as sources of exogenous variation in order to estimate the effect of interstate highways on regional innovation: a 10% increase in a region's stock of highways causes a 1.7% increase in regional patenting over a five-year period. In terms of the mechanism, we report evidence that roads facilitate local knowledge flows, increasing the likelihood that innovators access knowledge inputs from local but more distant neighbors. Thus, transportation infrastructure may spur regional growth above and beyond the more commonly discussed agglomeration economies predicated on an inflow of new workers.

We document empirical support for a key micro-level channel—innovation by young, private firms—through which financial sector deregulation affects economic growth. We find that intrastate banking deregulation, which increased the local market power of banks, decreased the level and risk of innovation by young, private firms. In contrast, interstate banking deregulation, which decreased the local market power of banks, increased the level and risk of innovation by young, private firms. These contrasting effects on innovation also translated into contrasting effects on economic growth. Our study suggests that the nature of financial sector deregulation crucially affects its potential benefits to the real economy.