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Working Paper



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We analyze the causal impact of improvements in the quality of communication infrastructure on the structural transformation of US counties. Our treatment is the quality of communication infrastructure in a county, measured by the average Internet speed offered to businesses. We use as an instrumental variable the spatial structure of ARPANET, a network funded by the Department of Defense that is considered the precursor of the Internet, and whose location we determine using historical government documents. We show that faster Internet stimulates short-run growth and increases the shares of employment and GDP in high-skilled services, while negatively affecting sectors such as retail, accommodation, and food services. Two mechanisms explain our results. First, input-output linkages since industries that buy more ICT inputs increase their weight on the local economy. Second, a rise in high-skilled workers in ICTintensive occupations, which is consistent with the Rybczynski theorem of the Hecksher-OhlinVanek model and with the presence of capital-skill complementarities. Lastly, we find that better Internet increases earnings inequality within U.S. counties. Such finding has implications for Internet subsidies across the country.