Credit Be Dammed: The Impact of Banking

Deregulation on Economic Growth

Elizabeth A. Berger
Alexander W. Butler
Edwin Hu
Morad Zekhnini

Rice University
July 2, 2015

Jones Graduate School of Business, Rice University, 6100 S Main St, MS-531, Houston,
TX 77005, USA. Corresponding author email address: alex.butler@rice.edu.

Acknowledgements: Without implicating them, we thank Alberto Abadie, Lee Ann Butler,
Kristine Hankins, Joseph Mohr, James Weston, Toni Whited, and especially Phil Strahan
for his detailed suggestions. We thank seminar participants at Fordham University, Rice
University, the Securities and Exchange Commission, University of Cincinnati, University
of Kentucky, and discussants and participants at the Financial Management Association,
Midwest Finance Association, and the Eastern Finance Association meetings for helpful
comments and suggestions. Clifford Woodruff, Shane Taylor, and the staff at the Bureau
of Economic Analysis provided data and assistance. We thank Jens Hainmueller for
providing the synthetic controls code on his website.

Credit Be Dammed: The Impact of Banking Deregulation on

Economic Growth

Abstract

We document substantial variation in the effect of state-level bank

branching deregulation in the United States on economic growth. We
examine the sources of this variation by testing multiple channels that may
link deregulation and economic growth. Using a matching method that
utilizes synthetic counterfactual states, we find support for the hypothesis
that economic growth was associated with states where deregulation
solved a capital immobility or dammed credit problem. We do not find
support for other channels, which posit that banks became more efficient,
financed more innovative businesses, or learned by observing prior
deregulations.

I. Introduction
This paper explores how financial development may cause economic growth. We exploit
the staggered, state-by-state deregulations of bank branching restrictions in the United States
where, between 1970 and 1996, 35 states deregulated their intrastate bank branching restrictions
at various times. Previous research using this setting, such as Jayaratne and Strahan (1996), finds
that branching deregulation causes economic growth, on average. Using a new method for
constructing individual state-level counterfactual units, we document rich heterogeneity in the
treatment effect of bank branching deregulation on economic growth. We go beyond calculating
the average treatment effect by exploring the sources of variation, and explaining why bank
branching causes economic growth in some states and not in others.
Instead of pooling our treated and control units and calculating an average treatment effect
via a difference-in-differences regression, the typical approach in this literature, we employ a novel
method called the synthetic controls method. We elaborate on the necessity of this approach
below. The synthetic controls method is similar in spirit to the tracking portfolio approach of
Lamont (2001). For each deregulating state we construct a portfolio of non-deregulating states
as a synthetic counterfactual, designed to match the deregulating state as closely as possible. The
main benefit of this approach is that we can construct a data-driven counterfactual for each
deregulating state, and, importantly, examine time-series and cross-sectional heterogeneity in the
economic impact of deregulation (see Abadie, Diamond, and Hainmueller, 2010).
When we estimate the overall treatment effect of bank branching deregulation, we find that
the average effect of deregulation on economic growth is indistinguishable from zero. Our
findings suggest that if regulators were to assign deregulation events randomlythe setting that

an empirical study might try to reproduce via truly exogenous variation in financial development
there would be no statistically significant economic growth effect.
However, the average treatment effect in the full sample obscures the significant
heterogeneity in state-level economic growth following deregulation. For example, five years after
deregulation we show that Connecticut experiences the largest abnormal growth of $4,110 in per
capita income compared to its synthetic control, whereas Mississippi experiences a reduction in
per capita income of $1,810 compared to its synthetic control.
Why did some states grow more than others? Our hypothesis is that bank branching
restrictions prevented banks from forming branch networks and restricted the flow of capital,
leading to high capital concentration prior to deregulation. Analogous to the use of inclusion or
exclusion requirements in a medical study, we group deregulating states based on the ex ante
capital concentration and use our synthetic control units to calculate the average treatment effect
within each subsample. We find that, after five years, deregulation leads to a $1,100 increase in
per-capita income for states with above median capital concentration. This increase represents a
5.8% change relative to the average pre-deregulation per capita income.
To understand why capital concentration predicts economic growth following
deregulation, we explore its correlation with post-deregulation banking activity and prederegulation economic growth. First, we examine whether capital concentration predicts bank
branching and lending activity following deregulation. We find that states with concentrated
capital more than double their branch network size (an average treatment effect of 1.8 branches
per institution) and lend 30% more per capita after deregulation. States with below median credit
concentration do not experience significant increases in branching or lending activity following
deregulation. Second, we find no correlation between capital concentration and per-capita income

growth in the pre-treatment period. This finding mitigates concerns that credit concentration and
economic growth are jointly determined.

We conclude that, in states with high capital

concentration, deregulation allowed banks to form intra-state branch networks, and to provide
increased access to capital (via increased lending), which led to economic growth.
We consider three alternative channels through which deregulation may have caused
economic growth: a bank efficiency channel, an innovation and entrepreneurship channel, and a
learning by observing channel. The bank efficiency channel suggests that deregulation spurred
competition among banks, causing banks to improve the efficiency of their operations, thereby
making better loans while cutting costs associated with non-lending activities (Jayaratne and
Strahan, 1996, 1998). The innovation and entrepreneurship channel suggests that deregulation
facilitated risk-sharing among bank branches, allowing banks to make more loans to small,
innovative businesses (Strahan and Weston, 1998; Black and Strahan, 2001; Acharya, Imbs, and
Sturgess, 2011). The learning by observing channel, proposed in DeLong and DeYoung (2007)
and Huang (2008), suggests that late deregulating states would have benefitted more from
deregulation because they were able to learn by observing prior deregulations. We do not find
support for these alternative channels: bank efficiency and patent activity prior to deregulation do
not predict economic growth, and growth mostly follows deregulations that occur early in the
sample.
The synthetic controls method allows us to provide new insight into the treatment effects
of bank branching deregulation that the standard difference-in-differences approach cannot. The
previous literature finds that difference-in-differences does not account for trends in economic
growth (Freeman, 2002), and does not provide a strong counterfactual for individual states (Huang,
2008).

Our approach not only addresses these issues but also controls for unobservable

characteristics that other techniques are unable to account for (e.g., propensity score matching).
The synthetic controls approach dramatically improves the quality of our counterfactual estimate
over the standard difference-in-differences approach, which we discuss below.
Using a synthetic counterfactual for each deregulating state, we find evidence of
heterogeneity in the responses to bank branching deregulation (cf. the Heckman, Urzua, and
Vytlacil, 2006, notion of essential heterogeneity in an instrumental variable setting). This
heterogeneity highlights another shortcoming of the difference-in-differences counterfactual: a
pooling estimator ignores heterogeneous treatment effects between states. Synthetic controls are
the key to identifying heterogeneous treatment effects in our study because, unlike the previous
literature, we are able to build a credible counterfactual for each deregulating state.
One caveat of the synthetic controls method is that it requires the researcher to choose an
appropriate donor pool and matching window length. Therefore we test that our results are robust
to an extensive list of donor pool and matching window choices. We ensure that our donor pool
excludes treatment effects from prior deregulation events by using a ten-year exclusion window
and a no re-entry exclusion window, which restrict re-entry of deregulated states into the donor
pool. We also limit the donor pool to include only states that deregulated prior to 1972. We
control for potential geographic spillover effects by restricting the donor pool to exclude states that
border the deregulating states. To address concerns that states have matching periods of different
length and quality, we repeat our main analysis and restrict all states to have a constant five-year
matching window length, and we weight treatment effects according to the quality of the
match. We find no qualitative difference in our main results under alternative specifications.
Our paper contributes to the continuing debate about whether finance leads to economic
growth. Our methodology creates more credible counterfactuals (Huang, 2008), as demonstrated

by the parallel trends between our treatment and control states (Freeman, 2002). In the subset of
states with concentrated capital, we find evidence of a link between finance and economic growth,
which supports the conclusion of Jayaratne and Strahan (1996). Our results support the hypothesis
that in the presence of capital constraints, bank branching deregulation led to the formation of
branching networks, which increased local access to capital, and ultimately spurred economic
growth. In addition, our findings complement the recent work of Gilje, Loutskina, and Strahan
(2015), which highlights the role of branch banking in local financial integration.
The remainder of the paper is organized as follows. Section II provides a brief historical
account of bank branching deregulation in the United States and the use of this natural experiment
in the literature. Section III introduces the synthetic controls methodology and its application to
the bank branching deregulation setting. In Section IV we present evidence of heterogeneity in
the treatment effects. Section V examines the dammed credit channel as an explanation of the
heterogeneity in economic growth. Section VI explores alternative channels of economic growth
proposed in the literature. Section VII presents robustness tests and Section VIII concludes.

II. Bank branching deregulation and economic growth

This section reviews the history of bank regulation in the United States and discusses the
staggered state-level deregulations. We highlight the cross-sectional and time-series variation
inherent in the history of US bank deregulation. In addition, we review the ways in which the
previous literature has exploited this variation to link financial development to economic growth.
A. History of state-level bank regulation
The history of state-level bank regulation and subsequent deregulation provides a
framework for exploring the effects of deregulation on economic growth. Until 40 years ago,

banking in the United States was heavily regulated at the state level. State laws prevented interstate
and intrastate bank branching. These laws restricted banks from opening new branches throughout
the state and they restricted bank holding companies from consolidating subsidiaries into branches.
Following the previous literature, we focus on 35 states that relaxed their intrastate
branching laws during our sample period, 1970 to 1996. Several key pieces of legislation pushed
states to deregulate throughout the sample period. In 1975, Oregon and Tennessee began to allow
out of state bank holding companies to own in-state banks. The federal Bank Holding Company
Act of 1982 allowed failed banks to be acquired by any holding company regardless of state
location, bypassing state-level restrictions of these acquisitions. In 1994 the Riegle-Neal Interstate
Banking and Branching Efficiency Act led all remaining states to deregulate intrastate branching
(Sherman, 2009).
Deregulation typically occurred in two steps. The first step allowed merger and acquisition
(M&A) branching, which permitted bank holding companies to convert subsidiaries into branches
or to purchase other banks and convert them into branches. The second step allowed banks to
branch via de novo branching, meaning that banks could originate and locate new branches
anywhere in the state. We use the M&A deregulation date to be consistent with the previous
literature. Table 1 provides the details of bank deregulation by state and year.
[Insert Table 1]
B. Data
We collect data on economic conditions, population, and banking sector characteristics for
each state. Our sample spans the period from 1970 to 1996 and covers 35 intrastate deregulations
that occurred between 1975 and 1991. Our analysis requires five years of data before and after
each deregulation event. As in Jayaratne and Strahan (1996), we exclude Delaware and South

Dakota from our sample due to the presence of unique tax incentives that eliminated usury ceilings
in order to attract credit card banks. Thirteen bank deregulations occurred prior to our sample
period. The thirteen deregulation events include twelve states and the District of Columbia. For
the remainder of the paper we refer to these deregulations as the thirteen states that deregulated
prior to the beginning of our sample and assign them a deregulation year of 1971.
We gather state-level data from the Bureau of Economic Analysis (BEA), the Bureau of
Labor Statistics (BLS), the US Census Bureau, the Federal Depository Insurance Corporation
(FDIC), the Chicago Federal Reserve Bank, and the National Bureau of Economic Research
(NBER). We use personal income per capita from the BEA to measure state-level economic
growth. We measure personal income per capita in 2005 US dollars using the consumer price
index (CPI) deflator from the BLS and scale personal income by the annual population per state.
We obtain state-level annual population data from the US Census Bureau. In order to control for
the health of a states economy prior to deregulation, we gather data on the size of the labor force
and the level of unemployment from the BLS. We calculate the population density of a state as
the ratio of the total state population to the total area of the state, measured in square miles. The
dataset includes average housing prices in each state from the US Census Bureau.
We also collect information on bank characteristics that we hypothesize will influence a
states choice to deregulate and the economic impact of deregulation. We measure the average
size of an institutions branch network as the number of branches divided by the number of
institutions. Using bank balance sheet data from the FDIC, we compute the ratio of non-interest
expenses to assets as a measure of bank lending inefficiency. We compute average loan interest
rates as the ratio of total income from loans and leases to total loans and leases. We measure loan

growth as the year over year growth in the dollar amount of loans in each state. We obtain a list
of bank-level M&A transactions from the Chicago Federal Reserve Bank between 1976 and 2013.
Following the recent literature, we proxy for innovation in a state with the number of
successful patent applications (Amore, Schneider, and Zaldokas, 2013; Chava, Oettl,
Subramaniam, and Subramaniam, 2013; Cornaggia, Mao, Tian, and Wolfe, 2015). We use the
National Bureau of Economic Research (NBER) patent data, which includes data on all the patents
awarded by the US Patent and Trademark Office (USPTO). To measure patent growth, we sum
all of the patents in each year for each state and scale state-level annual patents by the states total
patents in 1970.
Table 2 presents summary statistics for our sample states. The mean per capita income
over the 27 year period is $21,504, measured in 2005 US dollars. Average income growth over
our sample period is 2.27%, which is consistent with the national average income growth over the
period. The population density of states in our sample is 397 individuals per square mile. The
patent data exhibit a steady increase in aggregate state-level patenting activity between 1970 and
1996. The average patent growth rate is 129%, when patents are scaled by the 1970 level of
patents. The ratio of non-interest expenses to assets aggregated at the state level ranges from
1.81% to 6.63% with a mean of 3.12%. The average loan interest rate is 10.11% and the average
deposit rate is 3.80%.
[Insert Table 2]
C. Replication and literature review
Bank branching deregulation has provided a source of exogenous variation in access to
banking in numerous academic studies. Jayaratne and Strahan (1996) establishes a causal link
between deregulation and economic growth. Related literature suggests that banks become more

efficient after deregulation (Jayaratne and Strahan, 1998). Calem (1994) shows that banking
markets consolidate after deregulation. Clarke (2004) finds that bank deregulation enhances shortrun economic growth.
Studies subsequent to Jayaratne and Strahan (1996) find heterogeneity in the effect of
deregulation on economic growth. Specifically, Wall (2004) controls for regional effects and finds
that the deregulation effect varies across regions. In addition, Freeman (2002) compares the
economic growth in each deregulating state to the economic growth of the national economy and
finds that states deregulate when their economy has underperformed persistently relative to the
national economy. Huang (2008) compares the economic performance of contiguous counties on
either side of state borders and finds that only five of the 23 deregulation events in his sample lead
to positive and statistically significant economic growth. He concludes that deregulation does not,
in general, cause economic growth. The myriad contrasting results in the literature leave the debate
open for further investigation.
Because we are revisiting the setting from Jayaratne and Strahan (1996) with a different
empirical technique, we begin by replicating their main result. Table 3 presents regression results
for growth in personal income per capita due to bank branching deregulation. The basic model is
a difference-in-differences model with deregulation serving as the differencing dimension with
state and year fixed effects:
Yi.t
t i Di,t i,t
Yi,t1

(1)

where , is an indicator variable that takes the value of one if state deregulated by date , and
zero otherwise. Table 3 in our paper corresponds to Panel A of Tables II and IV in Jayaratne and
Strahan (1996). We find that bank branching deregulation has a positive and significant effect on
economic growth based on this specification. Deregulation increases personal income growth by
9

0.93% annually (0.94% in Jayaratne and Strahan, 1996) and is economically and statistically
significant. This result is robust to the presence of lagged growth and to estimation by weighted
least squares (WLS).1
[Insert Table 3]
D. Counterfactuals
The difference-in-differences specification in Table 3 relies on the assumption that the
average non-deregulating state provides a good counterfactual for the average deregulating state.
However, Freeman (2002) demonstrates that bank deregulations, in general, took place during
times of state-level economic lows. Hence, deregulating states are systematically different from
non-deregulating states, which raises the question of whether a difference-in-differences research
design is appropriate.
Huang (2008) studies county-level differences in economic growth for counties that are on
either side of a deregulating states border. However, there is an inherent tradeoff in his research
design between external validity and the validity of the counterfactuals. While event counties and
their cross-border control counties are probably economically similar, it is not clear that the results
extend to the state level, especially given that few state border counties, especially those in
Huangs (2008) sample, are hubs of economic activity. Additionally, by using the geographic
matching methodology, Huang loses one-third of the deregulation events.
The synthetic controls method of Abadie and Gardeazabal (2003) and Abadie, Diamond,
and Hainmueller (2010) provides a solution to this inference problem by producing a betterconstructed comparison unit for each deregulating state. The synthetic controls method allows us

Jayaratne and Strahan also control for regional effects by assigning states to one of four geographic regions of the
United States. In untabulated results we replicate their findings for the regional specifications and for the
specifications using growth in gross state product as the dependent variable.

10

to build a valid counterfactual, as in Huang (2008), while maintaining external validity by

capturing the entire state economy instead of just border counties.
There are several additional advantages to using a synthetic control as a counterfactual.
First, when units of analysis are large aggregate entities, such as states or regions, a combination
of comparison units (a synthetic control") often does a better job reproducing the characteristics
of the treated unit than any single comparison unit alone. Second, if the number of pre-intervention
periods in the data is large, matching on pre-intervention outcomes produces a match along both
observable and unobservable characteristics. Thus, the synthetic controls method mitigates
concerns over unobservable characteristics, which typically plague comparative case studies.
Third, because we are matching on pre-intervention data, the method does not require access to
post-treatment outcomes to construct the synthetic control.
The intuition behind the method is that only units that are alike along both observed and
unobserved determinants of the outcome variable should produce similar trajectories of the
outcome variable over extended periods prior to treatment. Thus, a good synthetic control contains
all the information about the deregulating state up to the point of deregulation. The method directly
addresses the potentially poor quality of control groups in the difference-in-differences approach,
while maintaining external validity by capturing the entire state economy.
E. Heterogeneous treatment effects
In addition to providing compelling counterfactual units, the synthetic controls method
permits us to measure the heterogeneous treatment effects of deregulation across the full sample
of 35 deregulation events. Huang (mimeo) states all of the state-level deregulations are not the
same, although all of them are called bank branching deregulation. He adds that a very natural
next step for this line of policy evaluation studies would be to look into the heterogeneity of the

11

[treatment effects] and study why some states/counties benefit more (or less) from a same policy
change.
Our paper advances the literature by using the synthetic controls method to construct a
counterfactual unit for each individual treated state, and hence to quantify individual treatment
effects. Having access to individual treatment effects allows us to split our sample based on predetermined measures of banking and economic conditions that forecast how much a state responds
to the deregulation. We use these subsamples to explore the sources of nonrandom variation in
the treatment effect of bank branching deregulation on economic growth. A simplistic approach
to exploring heterogeneous treatment effects would be to use a standard parametric setting by
simply interacting treatment-effects indicator variables with state-level characteristics.

The

difference-in-differences method pools treated units and compares them to pooled control units,
but prior literature shows that the pooled control units are biased because the average of the
controls is a poor counterfactual (Freeman, 2002; Huang, 2008). Furthermore, with only 35 treated
units sample splits are intractable in a regression framework.
The synthetic controls approach dramatically improves the quality of our counterfactual
estimates over the standard difference-in-differences approach. As a motivating example, consider
Figure 1, where we plot per capita income (solid line) through time for an event state, Texas,
compared to its estimated counterfactual (dashed line) using an OLS estimate (i.e., the equallyweighted average of per capita income in control states) in Panel A. Panel B is similar, but uses
the synthetic controls method, outlined in the next section, to estimate the counterfactual for Texas.
The vertical dashed lines denote the year of bank branching deregulation in Texas.

The

improvement in the counterfactual is visibly evident. To quantify the improvement, we measure

the quality of the match by the root mean squared prediction error (RMSPE, discussed in detail in

12

section III.B); the synthetic control reduces the RMSPE by 61% for Texas. This improvement is
typical for events in our sample.
[Insert Figure 1]

III. Synthetic controls methodology

This section describes the construction of our synthetic controls. Our discussion and
analysis in this section focus on economic growth following bank branching deregulation. In the
remainder of the paper, we use the synthetic controls method to construct a control for each
deregulating state and to examine the variation in the treatment effects of deregulation.
A. Synthetic controls: Theoretical construct
In order to illustrate the synthetic controls methodology, we use the example of Abadie,
Diamond, and Hainmueller (2010). Much of the following discussion draws heavily from their
paper. Assume that our data involve J+1 states for T periods. State 1 (the treatment unit) is
exposed to an intervention at time T0 (1<T0<T) and the remaining J states serve as potential
controls (the donor pool). Consider the following variables:

Yi ,It : The outcome for state i at time t if state i were exposed to the intervention.
Yi ,Nt : The outcome for state i at time t if state i were not exposed to the intervention.

Di ,t : An indicator variable that equals 1 if state i were exposed to the intervention at or before
period t, and 0 otherwise.
Then, Yi ,Nt Yi ,It i, t {1,2,..., T0 } . Also define the effect of the intervention on state i at time t,

i ,t Yi ,It Yi ,Nt . Then Yi ,t Yi ,Nt i ,t Di ,t

and the aim of the analysis is to estimate

( i ,T0 1 , i ,T0 2 ,..., i ,T ) .

We assume that the outcome variable can be characterized by:
13

Yi.tN t t Zi t i i,t

(2)

where t is an unobserved common factor, t is a vector of parameters, Zi is a vector of observed

covariates, t is a vector of unobserved common factors, i is a vector of unobserved common
factor loadings, and i, t is a transitory shock.
Suppose that a set of weights W* (w *2 ,..., w *J 1 ) exists that satisfies:
J 1

w Y
*

j 2

j,1

J 1

Y1,1,..., w j Yj,T0 Y1,T0 and

*

j 2

J 1

w Z
*
j

j 2

Z1 , i.e. the set of weights W * defines a

synthetic observation whose outcome variable and observable covariates match those of the
treatment unit during the pre-treatment window.
Under some regularity conditions, the synthetic state defined by W * provides a perfect
J 1

N
*
counterfactual for the treatment unit as the pre-treatment window gets large, i.e. Yi,t w j Yj,t
j 2

J 1

approaches 0 almost surely as T0 approaches infinity. As a practical matter, the value

w Y
*

j 2

j, t

provides a good approximation for Yi,Nt and we can obtain an approximation of i,t :
J 1

1,t Yi,t w *j Yj,t

(3)

j 2

In practice, an exact W * does not exist and we use a W that minimizes the distance
between the outcome variable and covariates of the synthetic unit and of the treatment unit during
the pre-treatment window. Formally, define:

X i (Zi' , Yi,1 , Yi,2 ,..., Yi,T0 ) and X 1 X 2

... X J

'

The regularity conditions and the proof of the proposition are outlined in Abadie, Diamond, and Hainmueller (2010).

14

Then W argmin X1 X -1 W (X1 X -1 W)' V(X 1 X -1 W) for some symmetric, positive semiW

definite matrix V.
J 1

T0

The value

(Y
t 1

1,t

W j Y j ,t ) 2 provides a measure of the goodness of fit of the synthetic

j 2

control and is referred to as the Mean Square Prediction Error (MSPE). Similarly, the Root Mean
Square Prediction Error (RMSPE), defined as the square root of the MSPE, can be used to assess
the goodness of fit.
The creation of a synthetic match as a linear combination of other states is comparable to
standard regression analysis (OLS). To demonstrate this relationship, the next example shows
how an OLS forecast for one states outcome is a linear combination of other states outcomes.
Consider the case where we want to predict an outcome variable
collection of covariates

XT .

YT

for (treated) state T using a

We have observations of the outcome variable

YC and the covariates

X C for control states C. Using an OLS regression we estimate a coefficient ( X C' X C ) 1 X C' YC
'
and use this estimate to form our forecast YT X T . If we re-arrange the terms we can write the
'
'
1
forecast as: YT YC X C ( X C X C ) X T .

Noting that the quantity W X C ( X C X C ) X T could be

'

'
viewed as a weight, we can see that the forecast YT YCW is indeed a linear combination of the

control states outcomes.

B. Matching
Our analysis begins by matching each states level of per capita income over time. We
create a synthetic match for each event state from the beginning of our sample to its deregulation
year based on the following covariates: per capita income, personal income growth, log of

15

population density, scaled patenting activity, change in bank efficiency, loan interest rate, deposit
rate, and the spread between the loan and deposit rates. These covariates permit us to replicate the
per capita income trajectory, but also control for the state-level banking environment, which we
hypothesize will be important in a states response to branching deregulation. In addition, by
including income growth and population density, we mitigate concerns that differences in state
population or the economic growth trajectory of a state might lead to differences in a states
response to deregulation.
During our sample period, 35 states deregulate at different points. To maximize the
number of states in the donor pool, we assume that the economic effects of deregulation are
negligible after a window of time. This assumption is corroborated by Jayaratne and Strahan
(1996); they find that deregulation effects diminish after a ten-year period. For every event state,
we first use a five-year exclusion window where only states that did not deregulate during that
window are allowed in the donor pool. We create this exclusion window to avoid potential
confounding effects and correlations among states deregulating within a short time of each other.
We then extend this exclusion window in the robustness tests reported in Section VII,
where we use a ten-year exclusion window, a no re-entry exclusion window to restrict re-entry
into the donor pool, a no-deregulators exclusion window that restricts the donor pool to include
only the states that deregulated prior to 1975, and a no border state exclusion window that
restricts the donor pool to exclude states that border the deregulating states. Our results are robust
to the choice of exclusion window. Using these criteria we are able to construct counterfactuals
for the 35 deregulation events, denoted in Table 1 with asterisks that occurred from 1975-1991.
It is helpful to think of the synthetic controls optimization routine as an analogue to the
tracking portfolio approach in asset pricing (Lamont, 2001). The tracking portfolio approach

16

allows us to find a weighted combination of non-deregulating states that optimally mimics the
characteristics of each deregulating state. Researchers can then draw statistical inference about
the economic indicator based on the projected performance of the tracking portfolio. Therefore,
synthetic states can be thought of as portfolios of states.

Each synthetic state is a portfolio of

states from the donor pool with the closest possible average pre-deregulation characteristics.
We evaluate the quality of our matches using the Root Mean Square Prediction Error
(RMSPE), which measures the distance between the event state and its synthetic counterpart prior
to deregulation. RMSPE is analogous to the tracking error of a portfolio where a low RMSPE
denotes a good match. Overall, our matches have low RMSPE, which indicates that the states in
our donor pool can closely mimic the income trajectory of each of our treatment states.
In Table 4 we show the composition of nine such portfolios for three of our best, median,
and worst matches, ranked by RMSPE. The average synthetic state is composed of about four
states, with an average portfolio weight of 30%. For example, synthetic Connecticut is a
portfolio of 9.1% California, 11.9% Hawaii, 22.7% D.C., and 56.3% Nevada. On the other hand,
synthetic Virginia is composed of a much more diverse portfolio of states. Mississippi matches to
only one state (100% Arkansas) and is one of our worst matches, but even so its RMSPE is only
1.36%. Mississippi has the highest poverty and lowest income, and is difficult to match as the
convex combination of multiple states. Nevertheless most state matches appear to provide a good
fit, both visually and based on the RMSPE.3
[Insert Table 4]

The synthetic control method bounds the matching weights to be between 0 and 1 to prevent extrapolation. However,
this restriction can be relaxed to allow negative weightsthe analog to short selling a matching state. When we
explore the effect of allowing negative weights, the resulting matches have a lower RMSPE and the average synthetic
state is composed of over a dozen states compared to four states in the main analysis. Relaxing the no extrapolation
restriction does not change our conclusions.

17

In Figure 2 we show the real (solid line) and synthetic (dashed line) per capita income
trajectories from 1970 to 1996. Figure 2 reveals that the synthetic control states are good matches
for our deregulating states. In the pre-deregulation years (i.e. the matching window) we are able
to get near-exact tracking for our best and median matches. Even for our worst matches (ranked
by RMSPE), the economic growth trajectory of the synthetic state follows the true states trajectory
quite well during the matching window.
[Insert Figure 2]
Table 5 presents the summary statistics for the real states and their synthetic controls during
the matching window. The table includes the covariates that we use to construct the synthetic
match: per capita income, personal income growth, log of population density, scaled patenting
activity, change in bank efficiency, loan interest rate, deposit rate, and the spread between the loan
and deposit rates. In addition, we include the unemployment rate, growth in bank loans, the
number of branches, average state housing prices, and bank profitability to verify that the matches
are able to control for variables not directly included in the match.
[Insert Table 5]
Column 5 reports the normalized differences of the means in characteristics between the
real and the synthetic control states. The normalized differences indicate that there is no significant
difference between our real states and their synthetic matches, with the exception of the population
density. The population density measure is influenced by the inclusion of the exceptionally dense
District of Columbia in the matching process.
The treatment effect of deregulation on economic growth is the difference between the per
capita income of each deregulated state compared to the per capita income of its synthetic control
in the post-deregulation period. A visual inspection of Figure 2 reveals that there is heterogeneity

18

among state-level responses to deregulation.

For example, Virginia exhibits a positive

deregulation effect whereas Pennsylvania experiences no deregulation effect.

C. Estimating the average treatment effect
We summarize the state-level treatment effects by estimating the average treatment effect.
Acemoglu, et al. (2013) propose the use of the inverse of the RMSPE measure as a weight to
construct the average treatment effect. This weighted average gives more importance to the units
with good matches and for which the treatment effect is more likely to be estimated precisely. The
exact formula for the estimated average treatment effect in Acemoglu, et al. (2013) is:

ATE
i

TEi
RMSPE i

RMSPE
i

The matches in our setting are of relatively good quality but there is plenty of variation
across states. In terms of RMSPE, some states are matched orders of magnitude better than others.
Employing the weighting procedure of Acemoglu, et al. (2013) in our setting over-weights a
handful of the event states and all but ignores the remainder of the sample. In order to maintain
the spirit of weighting treatment effects by the quality of the matches without sacrificing data
observations, we alter the weighting scheme by replacing RMSPE with its exponent. Taking
exponents prevents extreme values from dominating the weighting procedure. The average
treatment effect that we use is given by:

ATE
i

TEi
exp( RMSPE i )

exp( RMSPE )
i

Abadie, Diamond, and Hainmueller (2010) and Abadie and Gardeazabal (2003) develop
the synthetic controls method for comparative case studies in which one unit is treated and rely on
placebo studies to assess the impact of the treatment. Acemoglu, et al. (2013) extend the method
to apply synthetic controls to a sample with multiple treated units. Our paper is the first to evaluate
19

the statistical significance of the average treatment effects across multiple treated units with
synthetic controls using placebo deregulation events.
To evaluate the significance of the average treatment effect, we extend the placebo study
approach proposed in Abadie and Gardeazabal (2003) to multiple treated units. The idea is to
compare the economic growth of the same states during periods in which they did not deregulate.
This procedure allows us to assess whether the gap observed for the deregulating sample is due to
sampling variation or to an actual event.4 To construct placebo average treatment effects, we
perform the following process for each of our deregulating states. First, we assign the state a false
deregulation year, or a placebo deregulation. The placebo deregulation cannot be assigned to the
states true deregulation year or to a year within five years of the states true deregulation. For this
placebo state/deregulation year pair we repeat the method outlined in Section III.B to generate a
synthetic match. We then calculate the placebo deregulation effect as the difference between the
per capita income of the placebo state and its synthetic match. The event time year zero coincides
with the states placebo deregulation year. We apply the synthetic control method to each state
with each eligible placebo deregulation year to obtain a distribution of placebo treatment effects.
We assess statistical significance using confidence intervals from the sample of simulated
average treatment effects. We draw a random sample of 35 placebo deregulation events, to match
the number of deregulating states in our true sample.

Using our sample of 35 placebo

deregulations, we calculate an average treatment effect for each event year from -10 to 10. We
repeat this procedure 1,000 times to obtain a distribution of average treatment effects for each

We thank Alberto Abadie for suggesting a placebo study method to assess the statistical significance of our
average treatment effect across multiple treated units.

20

event year. We use the distribution of simulated placebo treatment effects to calculate confidence
intervals at the 95% and 99% levels.5

IV. Treatment effects

A.

Deregulation does not cause growth, on average.

Using the synthetic controls method outlined in the previous section, we calculate the

average treatment effect of deregulation for each deregulating state in our sample. The solid line
depicts the average treatment effect and the dashed lines denote confidence intervals at the 95%
and 99% levels. Prior to deregulation, there is no statistically significant difference between the
per capita income growth in event states compared to their synthetic matches, which suggests that
the synthetic matches are good counterfactuals.
Figure 3 shows that there is no statistically significant average treatment effect in the first
eight years following deregulation. However, over ten years, factors beyond the effects of
deregulation may begin to influence the evolution of a states economy. We cannot conclude that
bank branching causes economic growth unconditionally.
[Insert Figure 3]
B.

Heterogeneous treatment effects.

The absence of an average treatment effect does not necessarily imply that there is no

economic impact from deregulation.

Instead different states may respond to the treatment

differently, i.e. there is essential heterogeneity (Heckman, et al., 2006). For example, if half of
the states experience a positive treatment effect of $500 in average per-capita income growth, and
the other half experiences a negative treatment effect of $500 in average per-capita income growth,

In our robustness section, we form synthetic matches using more restrictive donor pools and our confidence
intervals are qualitatively consistent across changes in the donor pool.

21

then the unconditional average treatment effect would be zero, obscuring the economically
significant heterogeneity. Identifying the sources of heterogeneity is analogous to identifying
inclusion/exclusion requirements in a medical study where heterogeneity in responses is ex ante
expected. The synthetic controls approach allows us to identify heterogeneous treatment effects
because, unlike the previous literature, we are able to build a credible counterfactual individually
for each deregulating state.
Table 6 reports state-level abnormal treatment effects of bank branching deregulation on
economic and banking outcomes five years after deregulation. For each state we construct a
synthetic counterfactual based on the dependent variable listed in each column and measure the
abnormal economic activity as the difference between the realized and the synthetic series. Income
Growth refers to per capita income measured in $1,000. Branching refers to the number of
branches per institution. Patenting refers to the growth in patenting activity relative to the 1970
number of patents (in %). (In)efficiency refers to the non-interest expenses to assets ratio
(%). Loans refers to the per capita bank loans measured in $1,000.
[Insert Table 6]
Looking across the deregulating states, there is clear evidence of heterogeneity in the
treatment effects from bank branching deregulation. Table 6, Column 2 shows that the average
abnormal growth in per capita income across all states is $141 five years after
deregulation. However, the abnormal growth varies across states, from -$1,809 in Mississippi to
$4,011 in Connecticut. Bank branching activity shows similar variation. In Oregon, branching
networks quadrupled in size on average, whereas in Kentucky, branching networks contracted
following deregulation, relative to their synthetic counterfactuals.

22

The goal of the remainder of our paper is to understand the heterogeneity in the individual
treatment effects in order to advance the literature beyond the debate about the average treatment
effect (see for example, Jayaratne and Strahan, 1996; Huang, 2008). In order to understand the
heterogeneity, we examine different channels through which bank branching deregulation led to
economic growth in some states and not in others.

V. Dammed Credit
We propose the dammed credit channel as a potential explanation for the heterogeneous
economic growth across states following bank branching deregulation. This channel is similar to
the credit market integration friction in Gilje, Loutskina and Strahan (2015). The basic premise is
that regulatory frictions would have impeded capital mobility such that banks could not freely
move capital between branches to satisfy local demand, resulting in dammed credit. As a
consequence, qualified borrowers may not have been able to obtain loans. This inability to borrow
would have led to an inefficient allocation of resources, and at the macroeconomic level, would
have resulted in under-investment and low economic growth. Deregulation would have enabled
banks to form branch networks and to allocate capital more efficiently by turning deposits from
one geographic region into loans in another region. We look for evidence of the dammed credit
channel by looking for restrictions on capital mobility in each state prior to deregulation and
measuring the formation of branching networks and lending activity following deregulation.
We hypothesize that capital concentration indicates the lack of capital mobility between
financial institutions prior to deregulation within each state. The intuition is that in states with
high capital concentration, a few financial institutions hold the bulk of the capital. Branching
restrictions would have prevented these institutions from circulating their capital within the

23

state. Hence, prior to deregulation, concentrated capital would result in some areas with too
much capital and others with too little capital.
A measure of capital concentration is a state-level Herfindahl-Hirschman Index (HHI) of
bank deposits at the branch level, which requires deposits data for each bank branch in the
state. These data become available starting in 1994, close to the end of our sample period. Due
to data restrictions, we proxy for capital concentration using loans per institution. Loans per
institution measures the degree to which lendable capital is distributed among financial institutions
within a state, where a high ratio denotes high concentration and a low ratio denotes low
concentration. Using data from 1994 to the present, we verify that loans per institution has a high
correlation (60%) with the state-level HHI of branch deposits.
To test the dammed credit hypothesis, we divide deregulating states into two groups based
on the median pre-deregulation loans per institution and test if it forecasts economic growth
following bank branching deregulation for each group. Figure 4 plots the trajectory of the average
abnormal per-capita income for the two groups. States with above median loans per institution
experience an abnormal increase of $1,100 in per capita income within five years of deregulation,
which is statistically significant at the 95% level. On the other hand, states with below median
loans per institution experience no statistically significant economic growth within ten years of
deregulation. The confidence intervals are computed via bootstrapping with placebo deregulation
years.
[Insert Figure 4]
To understand why capital concentration predicts economic growth we examine whether
pre-deregulation loans per institution predicts bank mergers and acquisitions (M&A) and lending
activity following bank branching deregulation.

24

If bank branching regulation is a binding

constraint on branch networking, then deregulation should lead to increased M&A bank branching
activity. Our proxy for branching activity is the ratio of branches per institution, which increases
as banks consolidate into branch networks through mergers and acquisitions. We find that our
measure of M&A branching activity has a 59% correlation with a measure of M&A branching
obtained through data from the Chicago Federal Reserve Bank from 1976 to 2013. We use our
proxy because the Chicago Federal Reserve data begins six years after the start of our sample
period.
Figure 5 shows the evolution of the average abnormal branching activity in event time for
states whose loans per institution is above (Panel A) or below (Panel B) the median. Figure 5
indicates that pre-deregulation capital concentration explains the variation in the treatment effects
on bank branching activity. States with above median levels of loans per institution experienced
an average treatment effect of 1.8 branches per institution, whereas states with below median loans
per institution experienced no change in M&A branching activity.
[Insert Figure 5]
In addition, if capital concentration is linked to economic growth through M&A branching
activity and subsequent lending, then we should observe increased lending in states with high
capital concentration prior to deregulation. We calculate the abnormal level of lending in each
state by constructing a synthetic match for each state with loans per capita as the dependent
variable and follow the procedures outlined in Section III.
Figure 6 plots the abnormal lending per capita in states with above median (Panel A) and
below median (Panel B) pre-deregulation loans per institution. Like M&A activity, states with
high capital concentration (above median loans per institution) lend 30% more per capita after

25

deregulation. States with low capital concentration (below median loans per institution) do not
experience significant increases in lending activity following deregulation.
[Insert Figure 6]
To mitigate concerns that loans per institution and economic growth are jointly determined,
we examine the correlation between loans per institution and per-capita income growth in the pretreatment period. We regress the per-capita income growth on loans per institution over a ten-year
pre-deregulation window.

Table 7 reports the results of these regressions.

In multiple

specifications that include lagged values of loans per institution, we find no correlation between
loans per institution and economic growth in the pre-deregulation window, which suggests that
post-deregulation economic growth is not spurious.
[Insert Table 7]
The results in this section are consistent with our proposed dammed credit channel. We
find that deregulation only affected states with dammed credit, allowing banks to expand their
branch networks and make more loans. In states without dammed credit, the banking sector did
not experience any significant changes in branching or lending activity. We conclude that bank
branching leads to economic growth only where deregulation resolves the dammed credit problem.

VI. Alternative Channels of Economic Growth

In this section we explore alternative channels identified in the literature that may have
contributed to economic growth following deregulation. Specifically we examine the bank
(in)efficiency (Jayaratne and Strahan, 1996, 1998), innovation and entrepreneurship (Black and
Strahan, 2001; Strahan and Weston, 1998), and learning by observing (Huang, 2008; DeLong and
DeYoung, 2007) hypotheses. We apply the same procedure as in Section V, splitting our sample

26

based on proxies for each respective channel prior to deregulation. To evaluate the statistical
significance of the average treatment effects, we construct confidence intervals using the procedure
outlined in Section III.
A. Improvements in bank efficiency do not predict economic growth.
Jayaratne and Strahan (1996, 1998) find evidence that banks became more efficient after
deregulation and that deregulation led to economic growth. The authors argue that bank branching
deregulation permitted new banks to enter into local markets, resulting in more competition among
banks, and promoting more efficient lending practices. Following Jayaratne and Strahan (1998),
we measure bank (in)efficiency as the ratio of non-interest expenses to total assets. The intuition
behind this measure is that resources spent on non-interest expenses are wasteful and that reducing
these expenses improves efficiency.
To examine the bank efficiency channel, we split the sample based on the median statelevel non-interest expenses measured the year before deregulation. We calculate the average
treatment effect of deregulation among the subgroups of states with above and below median
inefficiency. Under the bank efficiency hypothesis, we expect that states with inefficient banks
should benefit from deregulation and experience positive average abnormal economic growth,
while states with efficient banks should experience negligible average abnormal economic
growth. Table 8, Rows 1 and 2 show that, contrary to the bank efficiency hypothesis, states with
inefficient banks prior to deregulation do not experience statistically significant average abnormal
growth following deregulation.

We conclude that the evidence does not support the bank

(in)efficiency channel of economic growth.

[Insert Table 8]
B. Innovation does not predict economic growth.

27

Entrepreneurs and small businesses play an important role in innovation and economic
growth, but face high costs of bank capital (see Berger and Udell, 1995; Petersen and Rajan, 1994;
Berger, Miller, Petersen, Rajan, and Stein, 2005; King and Levine, 1993). Strahan and Weston
(1998) and Black and Strahan (2001) find that better risk sharing leads to more bank financing for
entrepreneurs after bank branching deregulation. Moreover, recent studies find evidence that bank
branching deregulation leads to increased innovation, as measured by patenting activity (Amore,
Schneider, and Zaldokas, 2013; Chava, Oettl, Subramaniam, and Subramaniam, 2013; Cornaggia,
Mao, Tian, and Wolfe, 2015). We follow these recent studies and measure state-level patent filings
data using the NBER dataset, which includes all the patents awarded by the US Patent and
Trademark Office (USPTO). For comparability across states, we measure patent growth as the
cumulative patent growth since 1970 for each state. The intuition behind this measure is that if
banks are unable to spread risk across branches, then entrepreneurs may lack the access to capital
to finance innovation resulting in low patenting activity.
To examine the innovation and entrepreneurship channel, we split the sample based on the
median patenting activity measured the year before deregulation. We calculate the average
treatment effects of deregulation for each subgroup based on above and below median patenting
activity. Under the innovation and entrepreneurship hypothesis, we expect that states with below
median patenting activity should benefit the most from deregulation and experience positive
average abnormal economic growth. Table 8, Rows 3 and 4 show that, contrary to the innovation
and entrepreneurship hypothesis, states with low patenting activity do not experience statistically
significant average abnormal growth. We conclude that the evidence does not support the
innovation and entrepreneurship channel.
C. Learning by observing does not predict economic growth.

28

DeLong and DeYoung (2007) document a learning by observing phenomenon among

banks undertaking M&A ventures. They find that banks that engage in M&A activity later in time
have the opportunity to learn from prior bank M&A activity. Based on the learning by observing
hypothesis, Huang (2008) suggests that later deregulating states may have benefitted more from
bank branching deregulation because banks in later deregulating states were able to learn by
observing the experiences of banks in earlier deregulating states.
To examine the learning by observing channel, we split the sample based on whether the
state deregulated before 1985 (early) or in or after 1985 (late) following Huang (2008). Under the
learning by observing hypothesis, we expect that later deregulating states should experience
positive average abnormal economic growth, while early deregulating states should experience
negligible average abnormal economic growth. Table 8, Rows 5 and 6 show that, contrary to the
learning by observing hypothesis, early deregulating states experience statistically significant
average abnormal growth, while late deregulating states experience zero average abnormal
economic growth. We conclude that there is no evidence of the learning by observing channel.
Growth among the early deregulating states could be explained by the hypothesis that early
deregulating states had stronger economic incentives to deregulate (Kroszner and Strahan,
1999). Alternatively, Hennessey and Strebulaev (2015) argue that only unanticipated policy
shocks (i.e. early deregulations) should have any effect if economic agents are forward-looking.
Our results appear to be in line with the incentives hypothesis since we find that early deregulators
tend to have high credit concentration.

29

VII. Robustness
A. Alternative donor pools
We explore whether our estimates of the average treatment effect of deregulation on
economic growth are robust to changes in the construction of the donor pool. In our main results,
we impose a five-year exclusion period to construct the donor pool for our synthetic matching. In
Figure 7, we report the average treatment effect when we use synthetic matches constructed from
different donor pools. We find that our estimate of the average treatment effect from the main
analysis is robust to a variety of control groups constructed from donor pools that exclude states
according to the criteria presented in this section.
Using a narrower donor pool reduces the potential quality of the matches, but with the
benefit of more aggressively excluding donor pool observations that may be contaminated with
persistent deregulation effects. For instance, the average RMSPE when we impose a ten-year
exclusion window for the donor pool is 0.62 compared to an average RMSPE of 0.41 for the
matches based on the five-year exclusion window.
[Insert Figure 7]
First, we impose a ten-year exclusion window before and after the deregulation event in
order to construct our synthetic matches. This exclusion requires that the control group contain
states that have not experienced a deregulation event ten years before or ten years after the
deregulation of the treatment state. To construct the placebo sample, we assign placebo
deregulation years that are outside of the ten-year exclusion window. This procedure is analogous
to our five-year exclusion window, but is more restrictive in order to mitigate residual deregulation
effects that may persist in a deregulated state. Figure 7, Panel A depicts the average treatment
effect of the true deregulations (solid black line) and the 95% and 99% confidence intervals,

30

constructed from the placebo sample. The figure shows that after five years the per capita income
of deregulating states still has not exceeded the per capita income of control states. In years nine
and ten, the positive treatment effect is statistically significant at the 99% level.
Next, we allow the control group to contain only states that have never deregulated. The
motivation behind this no re-entry restriction is that after a state has deregulated, the impact of
deregulation on economic growth might be permanent. This restriction automatically excludes the
13 states that deregulated prior to 1975 because those states may have a permanent deregulation
effect embedded in their per capita income. Over the sample period, this restriction reduces the
match quality for late deregulating states, because few states remain in the donor pool. Figure 7,
Panel B depicts the average treatment effect using the no re-entry restriction. Starting in year
seven the positive average treatment effect of deregulation becomes statistically significant at the
95% level. In years nine and ten, the treatment effect is positive and statistically significant at the
99% level.
In another test, we consider only the 13 states that deregulated prior to the beginning of our
sample as potential control units. This control group corresponds to the control group that
Jayaratne and Strahan (1996) use in their Figure I. Figure 7, Panel C shows the average treatment
effect using this restriction. In years seven through ten, the deregulation effect is positive and
statistically significant.
Lastly, we control for potential geographical spillover effects by eliminating states that
border the deregulating state from the potential control group for each deregulating state. For each
deregulating state, we exclude bordering states from the potential control group and we impose a
five-year exclusion window. Figure 7, Panel D depicts the results from this robustness test. The
figure shows that after nine years the per capita income of deregulating states begins to exceed the

31

per capita income of control states. This effect is statistically significant at the 5% level. In year
ten, the positive treatment effect is statistically significant at the 1% level.
B. Unit banking and limited branching laws
Two forms of bank branching regulation existed during the sample period: unit-banking
laws, which were more restrictive, and limited branching laws, which were less restrictive. One
hypothesis is that more restrictive bank branching laws prior to deregulation explain economic
growth following deregulation.6
In untabulated results, we explore the deregulation effect of unit banking states compared
to that of limited branching states and do not find evidence that unit banking states experienced
higher economic growth following deregulation. Flannery (1984) questions the degree to which
the legal environment in a state materially restricted unit banking states, noting that of the 13 unitbanking states in our sample, only Wyoming enforced strict no-branching laws.
C. De novo branching deregulation
De novo branching permitted banks to open new branches anywhere within state borders.
De novo branching deregulation may have effects on economic growth that confound the economic
growth that we document from M&A deregulation. We repeat our main analysis using the de novo
branching dates as the event dates for branching deregulation to test this hypothesis.
The M&A and de novo branching dates reported in Table 1 of Jayaratne and Strahan (1996)
show that in general, states removed restrictions on M&A branching first and subsequently
permitted de novo branching. There are no instances in which de novo deregulation occurs prior
to M&A deregulation. Furthermore, some states relaxed M&A branching restrictions but did not
permit de novo branching during the sample period. In unreported tests, we verify that de novo

We thank Philip Strahan for suggesting this line of inquiry.

32

branching does not lead to economic growth. This result suggests that our results are not driven
by using the M&A branching events, rather than the de novo branching deregulations.

VIII. Conclusion and discussion

This paper provides new insight into the economic effects of bank branching deregulation.
First, we document that the average effect of deregulation on economic growth is indistinguishable
from zero in the full sample. These results are consistent with Huangs (2008) findings and suggest
that if regulators were to assign deregulation events randomly there would be no statistically
significant economic growth effect.

Second, we document significant heterogeneity in the

treatment effects of state-level bank branching deregulation on economic growth, and use this
heterogeneity to explore the mechanisms through which economic growth occurs.
Synthetic controls are the key to identifying the heterogeneous treatment effects and the
causal channels of bank branching deregulation on economic growth. We move the literature
forward by using credible, state-level counterfactuals to document heterogeneous treatment
effects, to identify the channels through which deregulation causes economic growth, and to rule
out alternative channels from the prior literature.
We show that the dammed credit channel is a mechanism through which deregulation
causes economic growth. Specifically, a states pre-deregulation capital concentration indicates
the degree to which deregulation impeded capital mobility and forecasts future economic growth.
Economic growth arises from increased bank branching activity and lending activity in these
states. In contrast, states with low levels of capital concentration did not experience subsequent
economic growth and did not increase their branching or lending activities following deregulation.
We find little evidence to support a bank efficiency channel, an innovation and entrepreneurship

33

channel, and a learning by observing channel. We conclude that financial development leads to
economic growth, but only where financial development resolves the dammed credit problem.

34

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30
Percapita Income ($ Thousands)
22
24
26
28
20

TX
OLS

1980

1985

1990

1995

Percapita Income ($ Thousands)

22
24
26

28

Year

20

TX
Synthetic

1980

1985

1990

1995

Year

Figure 1: Per Capita Income Trajectories with Matching Controls

This figure presents the per capita income trajectories for Texas and its matches. The matches are calculated
using two methods: Ordinary Least Squares (OLS) and Synthetic Controls (Synthetic). Under each method
the control trajectory of per capita income is calculated as an average of non-deregulating states from a
donor pool, which consists of all states that do not deregulate within 5 years of the Texas bank branching
deregulation. For the OLS method the control trajectory is the simple equally-weighted average of donor
pool trajectories. For the synthetic method the control trajectory is a weighted average of donor pool trajectories where the weights are determined using the synthetic controls method outlined in Section III. The
vertical dashed line denotes the year of bank branching deregulation.

37

40

Percapita Income ($ Thousands)

25
30
35

1975

1975

1975

1980

1980

1980

Year

Year

Year

1985

1985

1990

1990

WI
Synthetic

1995

1985

1990

1995

WY
Synthetic

1995

1970

1970

1970

1975

1975

1975

1980

1980

1980

Year

Year

Year

1985

1985

1985

1990

1990

1990

1995

MS
Synthetic

1995

CT
Synthetic

1995

VA
Synthetic

1970

1970

1970

1975

1975

1975

1980

1980

1980

Year

Year

Year

1985

1985

1985

1990

1990

1990

1995

ND
Synthetic

1995

WA
Synthetic

1995

PA
Synthetic

Figure 2: Per Capita Income Trajectories with Synthetic Controls

These figures present the per capita income trajectories for deregulating states and their synthetic state matches. New Jersey (NJ), Virginia (VA), and
Pennsylvania (PA) constitute the three best matches (top panel). Wisconsin (WI), Connecticut (CT), and Washington (WA) constitute the three median
matches (middle panel). Wyoming (WY), Mississippi (MS), and North Dakota (ND) constitute the three worst matches (bottom panel). Control states
are constructed by the data-driven synthetic controls method in which deregulating (event) states are matched to a portfolio of non-deregulating states
that best replicate a selection of covariates during the pre-event period. The outcome variable is the level of per capita income in each state. The
solid line represents the per capita income in each event state and the dashed line represents the per capita income in the synthetic control state. The
vertical lines denote the year in which the state deregulated.

1970

1970

1970

NJ
Synthetic

30

15

Percapita Income ($ Thousands)

20
25

30

15

Percapita Income ($ Thousands)

20
25

20

Percapita Income ($ Thousands)

20
25
30
15
40
Percapita Income ($ Thousands)
25
30
35
20
25
Percapita Income ($ Thousands)
15
20
10

30
Percapita Income ($ Thousands)
20
25
15
Percapita Income ($ Thousands)
20
25
30
15
Percapita Income ($ Thousands)
15
20
25
10

38

Gap in Per Capita Income ($ Thousands)

1
.5
0
.5
1

Average Treatment Effect

0.20

10

0
Year
ATE

95% CI

10

99% CI

Figure 3: Average Treatment Effect (Per Capita Income)

Figure 3 depicts the average treatment effect of deregulation on a states per capita individual income in the
full sample of deregulation events. To calculate the average treatment effect, we match each deregulating
state to a synthetic state based on per capita income and a selection of covariates prior to deregulation. In
each year subsequent to deregulation the treatment effect is the difference between the per capita income
of the deregulating state and the per capita income of the synthetic match for that state for that year. The
average treatment effect is the weighted average of individual state treatment effects in event time, weighted
by the quality of the match (RMSPE). The confidence bounds are calculated by randomly sampling a set
of states and assigning each an arbitrary deregulation year (placebo deregulation). We calculate an average
treatment effect for this group of state/deregulation year combinations. The procedure is repeated 1,000
times and for each event year the 95% and 99% values of the treatment effect from the placebo samples are
used as confidence intervals.

39

Gap in Percapita Income ($ Thousands)

2
1
0
1
2

Gap in Percapita Income ($ Thousands)

2
1
0
1
2

Average Treatment Effect

10

Average Treatment Effect

Year
ATE

95% CI

10

Year
99% CI

ATE

(a) High Loans per Institution Sample

95% CI

99% CI

(b) Low Loans per Institution Sample

Figure 4: Average Treatment Effects Based on Loans per Institution

Figure 4 depicts the average effect of deregulation on a states per capita individual income for subsamples
based on loans to institutions prior to deregulation. We match each deregulating state to a synthetic state
based on observations of per capita income and a selection of covariates prior to deregulation. In each
year subsequent to deregulation the treatment effect is the difference between the per capita income of the
deregulating state and the per capita income of the synthetic match for that state for that year. The average
treatment effect is the weighted average of individual state treatment effects in event time, weighted by
the quality of the match (RMSPE). Panel A represents a sample of deregulating states whose loans per
institution prior to deregulation was higher than the full sample median, while panel B represents a sample
of deregulating states with below median loans to institution at the time of the deregulation. The confidence
bounds are calculated by randomly sampling a set of states and assigning each an arbitrary deregulation year
(placebo deregulation). We calculate an average treatment effect for this group of state/deregulation year
combinations. The procedure is repeated 1,000 times and for each event year the 95% and 99% values of
the treatment effect from the placebo samples are used as confidence intervals.

40

Gap in Branches per Bank

0
2
2

Gap in Branches per Bank

0
2

Average Treatment Effect

Average Treatment Effect

10

0
Year
ATE

95% CI

10

10

99% CI

0
Year
ATE

(a) High Loans per Institution Sample

95% CI

10

99% CI

(b) Low Loans per Institution Sample

Figure 5: Abnormal Bank Branching Activity Based on Loans per Institution

Figure 5 depicts the average effect of deregulation on a states bank branching activity for subsamples based
on loans to institutions prior to deregulation. We match each deregulating state to a synthetic state based
on observations of bank branching activity and a selection of covariates prior to deregulation. In each year
subsequent to deregulation the treatment effect is the difference between the bank branching activity of the
deregulating state and the bank branching activity of the synthetic match for that state for that year. The
average treatment effect is the weighted average of individual state treatment effects in event time, weighted
by the quality of the match (RMSPE). Panel A represents a sample of deregulating states whose loans per
institution prior to deregulation was higher than the full sample median, while panel B represents a sample
of deregulating states with below median loans to institution at the time of the deregulation. The confidence
bounds are calculated by randomly sampling a set of states and assigning each an arbitrary deregulation year
(placebo deregulation). We calculate an average treatment effect for this group of state/deregulation year
combinations. The procedure is repeated 1,000 times and for each event year the 95% and 99% values of
the treatment effect from the placebo samples are used as confidence intervals.

41

10

0
Year
ATE

95% CI

Gap in Loans per Capita ($ Thousands)

.04
.02
0
.02
.04

Gap in Loans per Capita ($ Thousands)

.04
.02
0
.02
.04

Average Treatment Effect

10

99% CI

Average Treatment Effect

10

0
Year
ATE

(a) High Loans per Institution Sample

95% CI

10

99% CI

(b) Low Loans per Institution Sample

Figure 6: Abnormal Lending Activity Based on Loans per Institution

Figure 6 depicts the average effect of deregulation on a states lending activity for subsamples based on
loans to institutions prior to deregulation. We match each deregulating state to a synthetic state based on
observations of lending activity and a selection of covariates prior to deregulation. In each year subsequent
to deregulation the treatment effect is the difference between the lending activity of the deregulating state
and the lending activity of the synthetic match for that state for that year. The average treatment effect is the
weighted average of individual state treatment effects in event time, weighted by the quality of the match
(RMSPE). Panel A represents a sample of deregulating states whose loans per institution prior to deregulation was higher than the full sample median, while panel B represents a sample of deregulating states with
below median loans to institution at the time of the deregulation. The confidence bounds are calculated by
randomly sampling a set of states and assigning each an arbitrary deregulation year (placebo deregulation).
We calculate an average treatment effect for this group of state/deregulation year combinations. The procedure is repeated 1,000 times and for each event year the 95% and 99% values of the treatment effect from
the placebo samples are used as confidence intervals.

42

Average Treatment Effect

Gap in Per Capita Income ($ Thousands)
1
.5
0
.5

Gap in Per Capita Income ($ Thousands)

1
.5
0
.5
1

Average Treatment Effect

0.10

10

0
Year
ATE

95% CI

10

0.24

10

99% CI

ATE

(a) 10 Year Exclusion

Gap in Per Capita Income ($ Thousands)
1.5
1
.5
0
.5
1

Gap in Per Capita Income ($ Thousands)

1.5
1
.5
0
.5

0
Year
ATE

95% CI

10

99% CI

Average Treatment Effect

0.22

95% CI

(b) No Re-entry

Average Treatment Effect

10

0
Year

10

0.005

10

99% CI

0
Year
ATE

(c) Original 13 States

95% CI

10

99% CI

(d) No Border States

Figure 7: Average Treatment Effects Under Alternate Specifications

Figure 7 depicts the average effect of deregulation on a states per capita individual income using different
donor pools to construct the synthetic match of a deregulation state. We match each deregulating state to a
synthetic state based on observations of per capita income and a selection of covariates prior to deregulation.
In each year subsequent to deregulation the treatment effect is the difference between the per capita income
of the deregulating state and the per capita income of the synthetic match for that state for that year. The
average treatment effect is the average of the deregulating state treatment effects calculated in event time.
The different panels represent different donor pools for the construction of the synthetic match. Panel 7a
represents the average treatment effect when the donor pool is restricted to include only those states that did
not deregulate within 10 years of the deregulation of the state to be matched. In Panel 7b, the donor pool
consists of only those states that have not deregulated prior to the state in question and do not deregulate
less than 5 years thereafter. The donor pool used for Panel 7c includes only states that deregulatd prior to
our sample. The donor pool used for Panel 7d consists of the base case donor pool with a 5 year exclusion
window, but in addition all bordering states are also excluded from the donor pool to avoid geographical
contamination. The confidence bounds are calculated by randomly sampling a set of states and assigning
each an arbitrary deregulation year (placebo deregulation). We calculate an average treatment effect for
this group of state/deregulation year combinations. The procedure is repeated 1,000 times and for each
event year the 95% and 99% values of the treatment effect from the placebo samples are used as confidence
intervals.

43

Table 1: Bank Branching Deregulation

The following table reports each state in our sample with its corresponding deregulation year. We use the
year in which a state completed deregulation of M&A branching as the year of deregulation. In our analysis,
we analyze the effects of deregulations that occur after 1972, resulting in 35 deregulations. The remaining
states are included in the sample as potential control states in our synthetic controls procedure. * denotes an
event state in our sample.
State
Alabama*
Alaska
Arizona
Arkansas
California
Colorado*
Connecticut*
District of Columbia
Florida*
Georgia*
Hawaii*
Idaho
Illinois*
Indiana*
Iowa
Kansas*
Kentucky*
Louisiana*
Maine*
Maryland
Massachusetts*
Michigan*
Minnesota
Mississippi*
Missouri*

Deregulation Year

State

1981
1971
1971
1994
1971
1991
1980
1971
1988
1983
1986
1971
1988
1989
2001
1987
1990
1988
1975
1971
1984
1987
1993
1986
1990

Montana*
Nebraska*
Nevada
New Hampshire*
New Jersey*
New Mexico*
New York*
North Carolina
North Dakota*
Ohio*
Oklahoma*
Oregon*
Pennsylvania*
Rhode Island
South Carolina
Tennessee*
Texas*
Utah*
Vermont
Virginia*
Washington*
West Virginia*
Wisconsin*
Wyoming*

44

Deregulation Year
1990
1985
1971
1987
1977
1991
1976
1971
1987
1979
1988
1985
1982
1971
1971
1985
1988
1981
1971
1978
1985
1987
1990
1988

Table 2: Summary Statistics

Table 2 presents the summary statistics for our sample across states and over time. Our data set spans the
years 1970-1996. We construct our measure of per capita income as personal income per state per year.
Using the national Consumer Price Index (CPI), we measure state income in 2005 US dollars. We divide the
CPI adjusted annual state income by the annual state population. We use state population figures from the
Yt,i
Bureau of Labor Statistics annual report. Income growth is defined as Yt1,i
, where Y is the per capita income
for each state (i) in each year (t). The population density of a state is the ratio of the total state population
and the total area of the state, measured in square miles. Patent growth is the growth in awarded patents in
the state relative to the number of patents awarded in 1970. The yearly change in Non-Interest Expenses to
Assets is calculated using aggregate banking data for each state. The Loan and Deposit rates are estimates
of the average rate charged/payed by banks for loans and deposits. The interest rate spread is the difference
between the loans rate and the deposit rate. We exclude Delaware and South Dakota from our analysis due
to the presence of unique tax incentives that eliminated usury ceilings in order to attract credit card banks.
The data reported are for the 49 remaining states (including the District of Columbia).

Per Capita Income

Income Growth (%)
log(Population Density)
Patent Growth
Change in Non-Interest Expenses to Assets (%)
Loan Rate (%)
Deposit Rate (%)
Interest Rate Spread (%)

45

Mean

SD

Min

Max

945
910
945
945
910
945
945
945

21,504
2.27
3.97
1.29
0.04
10.11
3.80
6.31

4,307
1.92
0.93
0.56
0.16
1.89
1.37
0.88

11,665
-3.00
1.36
0.55
-0.61
6.51
1.33
4.46

33,205
10.55
5.73
4.89
1.19
15.25
7.40
10.51

Table 3: Growth Regressions: Replication and Original Results

We replicate the main results from Jayaratne & Strahan (1996) using their sample period from 1972-1992
(Panel A). These results correspond to Tables 2 and 4 in Jayaratne & Strahan (1996) which we present in
Yt,i
Panel B. We include estimates from their differences-in-differences specification Yt1,i
= t + i + Dt,i +
t,i and the differences-in-differences specification that includes three lags of growth. Deregulation is a
dummy variable equal to 1 in the years following deregulation and zero in the years prior to deregulation.
The variables Incomet1 , Incomet2 , and Incomet3 represent per capita income measured in 2005 US
dollars at 1, 2, and 3 year lags. In all regressions we include year and state fixed effects, indicated by
Controls. We report heteroskedasticity robust standard errors in parentheses. *, **, and *** indicate
significance at the 5%, 1% and .1% levels, respectively.
Replication
OLS
0.767*
(0.32)

WLS
0.742*
(0.28)

Incomet1

0.0084
(0.12)

Incomet2

Incomet3

Deregulation

Controls
R2
N

OLS
0.932**
(0.31)

Panel A:
WLS
1.070***
(0.30)

Original
OLS
0.88**
(0.27)

WLS
0.97**
(0.23)

0.1187
(0.08)

0.12
(0.09)

0.18**
(0.05)

-0.06179
(0.07)

0.02406
(0.05)

-0.05
(0.06)

0.04
(0.04)

-0.0416
(0.06)

-0.0000138
(0.04)

-0.06
(0.08)

0.02
(0.04)

OLS
0.94**
(0.26)

Panel B:
WLS
1.19***
(0.24)

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

49.9%
1,015

71.2%
1,015

52.3%
915

74.0%
915

49.0%
1,015

70.0%
1,015

50.0%
1,015

72.0%
1,015

46

Table 4: Synthetic Controls for Selected States

This table provides the weights of control states that most closely match a selection of 9 deregulating states. We
create a synthetic match for each state in our sample using the synthetic controls methodology. The synthetic
matches are weighted averages of potential control states. We match states during a pre-deregulation window
of at least 5 years. The synthetic controls method minimizes the mean-squared prediction error (goodness-offit) between the true state and a portfolio of potential matching states during the pre-deregulation window for
a specified set of covariates. The covariates that determine the match are per capita income, personal income
growth, log of population density, scaled patenting activity, change in bank efficiency, loan rate, deposit rate, and
the spread between the loan and deposit rates. The weights are rounded to the nearest third decimal place.

State
Alaska
Alabama
Arkansas
Arizona
California
Colorado
Connecticut
District of Columbia
Florida
Georgia
Hawaii
Iowa
Idaho
Illinois
Indiana
Kansas
Kentucky
Louisiana
Massachusetts
Maryland
Maine
Michigan
Minnesota
Missouri
Mississippi
Montana
North Carolina
North Dakota
Nebraska
New Hampshire
New Jersey
New Mexico
Nevada
New York
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
Tennessee
Texas
Utah
Virginia
Vermont
Washington
Wisconsin
West Virginia
Wyoming
RMSPE

VA

NJ

PA

WI

CT

WA

WY

MS

ND

0.009
0.162
0.011
0.059
0.042
0.092
0.044
0.057
0.426
0.096
0.03

0.070
0.025
0.301
0.158
0.007
0.439
0.03

0.017
0.169
0.069
0.034
0.061
0.106
0.228
0.231
0.085
0.04

0.026
0.524
0.031
0.077
0.249
0.001
0.091
0.27

0.091
0.227
0.119
0.563
0.27

0.036
0.280
0.146
0.064
0.248
0.226
0.31

0.256
0.631
0.112
1.20

1.000
1.36

0.179
0.544
0.277
1.77

47

Table 5: Matching Period Characteristics

Table 5 presents a summary of the covariates used in the construction of synthetic matches as well as
additional state-level characteristics during the matching period. For each state in our sample we construct
a synthetic match using the synthetic controls method. We then calculate the characteristics of the synthetic
match as a weighted average of the constituents of the match. All variables for the synthetic match are
constructed in the same manner as our original sample. We include a measure of loans growth as the change
in loans scaled by prior year loans. We measure bank profits as net income scaled by deposits. In addition,
the table includes the number of bank branches and average housing prices in each state. We report the
average and standard deviation of all variables for each real and synthetic state during the pre-deregulation
period. The last column reports the normalized difference in means between the real and synthetic samples
during the matching period (i.e. prior to deregulation).
Real
Per Capita Income
Income Growth (%)
Population Density
Patent Growth
Change in Non-Interest Expenses to Assets (%)
Loan Rate (%)
Deposit Rate (%)
Interest Rate Spread (%)
Unemployment (%)
Loans Growth (%)
Branches
Housing Prices
Bank Profit (%)

Mean
18,916
2.349
4.108
1.066
0.000
9.973
3.915
6.058
7.113
10.613
565
94,569
0.963

48

SD
3,071
3.308
1.238
0.303
0.001
2.263
1.560
1.007
2.381
7.642
592
23,098
0.328

Synthetic
Mean
18,960
2.364
3.782
1.063
0.039
10.012
3.815
6.197
7.110
11.879
642
96,341
1.001

SD
2,934
2.230
0.932
0.219
0.113
2.116
1.427
0.867
1.358
7.031
418
23,577
0.194

Norm. Diff.
-0.015
-0.006
0.298
0.010
0.029
-0.018
0.067
-0.148
-0.172
0.000
-0.150
-0.076
-0.145

Table 6: Average Treatment Effects by State

Table 6 summarizes the average treatment effect for each state 5 years following deregulation. The table
reports the average treatment effect for economic growth and for economic variables that are potentially
associated with economic growth. The treatment effect for each variable is calculated as the difference
between the realized value and the value of a synthetic match for the state, where the synthetic state was
constructed with the given economic variable as the dependent variable. Income Growth refers to per capita
income measured in $1,000. Branching represents the number of branches per institution. Patenting is the
level of patents (%) scaled by 1970 patents level in each state. Inefficiency is calculated as the charge-off to
asset ratio (%). Loans is the per capita bank loans measured in $1,000.
(1)
Deregulation
Year

(2)
Abnormal
Income Growth

(3)
Abnormal
Branching

(4)
Abnormal
Patenting

(5)
Abnormal
(In)efficiency

(6)
Abnormal
Loans

1986
1975
1990
1987
1991
1990
1981
1988
1988
1987
1988
1985
1987
1987
1988
1987
1979
1988
1982
1985
1990
1989
1981
1976
1990
1988
1985
1986
1985
1983
1984
1978
1991
1977
1980

-1.8097
-1.6179
-1.5332
-1.3615
-0.8525
-0.7545
-0.7439
-0.6730
-0.5250
-0.4346
-0.4141
-0.3747
-0.3201
-0.2449
-0.2383
-0.1900
-0.1477
-0.0355
0.0197
0.0675
0.0844
0.2920
0.3269
0.3881
0.5618
0.6052
0.6476
0.8945
1.1125
1.2271
1.3812
1.6235
1.7282
2.1398
4.1100

0.9564
1.0646
-0.4439
3.5223
1.5510
-0.1743
1.5853
0.3985
0.0868
1.0942
0.8791
0.0677
-0.0882
0.6909
-0.2346
-0.3802
1.4566
0.9579
1.2409
4.3645
0.6531
1.8457
0.6789
8.1815
0.9566
0.6544
1.0853
-3.6972
0.9529
1.0550
2.7310
3.2500
1.3102
3.8649
0.8232

-0.1110
0.0000
0.0437
-0.1597
-0.2792
-0.0777
-0.0573
-0.2350
-0.6784
-0.4369
-0.0861
-0.5307
-0.1759
-0.3759
-3.3934
0.0460
-0.0149
-0.1119
0.0273
0.0755
-0.0687
-0.1777
0.2193
-0.2087
-0.1652
-0.4986
-0.2578
0.1269
0.2358
0.3269
-0.1195
-0.0551
-0.0766
-0.0446
-0.1730

-0.0034
-0.0027
-0.0034
-0.0007
-0.0015
-0.0019
-0.0025
-0.0034
-0.0031
-0.0028
-0.0085
0.0065
0.0000
0.0105
-0.0100
-0.0041
0.0018
-0.0021
0.0011
-0.0060
-0.0027
-0.0023
-0.0018
-0.0032
-0.0029
-0.0025
-0.0039
-0.0098
-0.0029
0.0012
0.0010
0.0007
-0.0083
0.0001
-0.0007

-0.0091
-0.0125
-0.0152
0.0033
-0.0351
0.0044
-0.0206
-0.0188
-0.0264
0.0026
0.0070
-0.0197
-0.0046
-0.0247
-0.0242
-0.0082
-0.0090
-0.0178
0.0158
-0.0302
0.0086
-0.0115
-0.0010
0.1630
-0.0131
-0.0193
-0.0048
0.0643
-0.0114
0.0122
0.0619
-0.0015
-0.0487
-0.0060
0.0031

Mean

0.1411

1.2269

-0.2134

-0.0021

-0.0014

Median

-0.0355

0.9566

-0.1110

-0.0025

-0.0090

State Name
Mississippi
Maine
Montana
Michigan
New Mexico
Kentucky
Utah
Illinois
Oklahoma
West Virginia
Florida
Nebraska
Kansas
New Hampshire
Wyoming
North Dakota
Ohio
Texas
Pennsylvania
Oregon
Missouri
Indiana
Alabama
New York
Wisconsin
Louisiana
Tennessee
Hawaii
Washington
Georgia
Massachusetts
Virginia
Colorado
New Jersey
Connecticut

49

50
Yes
Yes
0.418
355

R2
N

0.114
(1.54)

0.419
355

Yes
Yes

0.13
(1.65)

Full Sample

Full Sample

Year F.E.
State F.E.

LoansperInstitutiont2

LoansperInstitutiont1

LoansperInstitution

PCI Growth

PCI Growth

0.418
347

Yes
Yes

0.0285
(0.17)

0.12
(0.80)

Full Sample

PCI Growth

0.417
169

Yes
Yes

-0.43
(-0.67)

Low Loans
per Institution

PCI Growth

0.571
160

Yes
Yes

0.0958
(1.50)

High Loans
per Institution

PCI Growth

Table 7: Loans per Institution and Per Capita Income Growth

Table 7 presents estimates of the relationship between loans per institution and per capita income growth prior to bank branching deregulation. For
all deregulating states in our sample we calculate the relationship for up to 10 years prior to deregulation excluding the deregulation year in each
estimation. All the models regress per capita income growth on loans per institution including state and year fixed effects. Columns 1 through 3 use
the full sample of deregulating states with contemporaneous and lagged measures of loans per institution. Columns 4 and 5 report the results for the
subsample of states whose loans per institution prior to the deregulation event were below and above the full sample median, respectively. We report
t-statistics in parentheses. *, **, and *** indicate significance at the 5%, 1% and .1% levels, respectively.

Table 8: Alternative Channel Treatment Effects

Table 8 reports average treatment effects for the inefficiency, innovation and entrepreneurship, and learning
by observing channels of economic growth. For each channel we sort states based on values of the proxy one
year before deregulation (non-interest expenses to assets, patenting activity, and deregulation year, respectively) into above and below median subgroups. We construct synthetic controls following the procedure
outlined in Section III, and report the average treatment effect for each channel and subgroup 5 years after
deregulation, along with the bootstrapped 5% and 95% confidence intervals.
Series

5%

Treatment Effect

95%

Inefficiency (Low)
Inefficiency (High)

-0.81
-0.81

-0.016
0.467

0.67
0.67

Patents (Low)
Patents (High)

-0.80
-0.80

0.339
0.053

0.66
0.66

Early (< 1985)

Late ( 1985)

-0.64
-0.64

1.203
0.094

1.01
1.01

51