The 1862 Homestead Act provided free land conditional on five years of residency and cultivation to settlers of the American West. In total, the Act granted 10% of the land in the United States to 1.6 million individuals. This study examines the impact of the Act on long-run development. Using spatial regression discontinuity and instrumental variable designs, we find that areas with greater historical exposure to homesteading are poorer and more rural today. The impact on development is not only driven through differences in the urban share of the population; cities in homesteading areas are less developed and non-agricultural sectors are less productive. Using newly geo-referenced historical census data, we document the path of divergence starting from the initial settlement. We find that homesteading regions were slower to transition out of agriculture. The historical and empirical evidence is consistent with the hypothesis that the transitory distortions caused by the Act’s residency and cultivation requirements induced selection on settlers’ comparative advantage in agriculture. This, in turn, inhibited the development of non-agricultural sectors and the subsequent benefits of agglomeration.