Proximity and Knowledge Spillovers: Evidence from the Introduction of New Airline Routes

Abstract

This paper examines the causal relationship between proximity and knowledge diffusion by estimating the elasticity of core-based statistical area (CBSA) pair-level citations to variations in travel time induced by the introduction of new flight routes. The findings reveal that decreasing travel time between U.S. cities by 20% increases knowledge flow by 0.5%, which corresponds to an increase of over 15,000 citations at the aggregate level. Rather than boosting within-firm knowledge transfer, travel time reduction leads to a rise in knowledge spillovers primarily across firm boundaries, particularly among those that form joint ventures, have block holdings in each other, or form supply chain relationships. These effects are stronger among city pairs located farther away from each other, with higher absorptive capacity, in complex technology classes, and for newly developed technologies. Additional mechanism tests suggest that the most likely channel through which travel time reduction impacts knowledge spillover is by influencing the transfer of tacit knowledge via facilitating cross-CBSA inventor flow and information acquisition. This paper was accepted by Tomasz Piskorski, finance. Funding: S. Zhou receives support from the National Natural Science Foundation of China [Grant 71804155] and China Fundamental Research Funds for the Central Universities [Grant 20720181047]. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2021.01717 .