Local policy effects at a time of economic crisis

Regional inequalities are large and have widened during the Great Recession. As they prompt people and economic activities to migrate from lagging regions, central governments around the world transfer large amounts of resources in order to prevent these phenomena from occurring. In this paper, we evaluate the effectiveness of the most extensive and long-lived experiment of income redistribution across regions and countries, i.e., the EU regional policy, at a time of economic crisis. Exploiting geographic discontinuities in funds eligibility and using a spatial regression discontinuity design, we analyze comprehensive data on all publicly funded Italian projects at the municipality level. We find a positive and significant impact on employment and number of plants in the least developed regions. However, the impact turns largely negligible when the gap between more and less intensively treated areas is relatively small. Moreover, the EU regional policy appears not to have had any effect on local average income.