Absorptive Capacity and the Growth and Investment Effects of Regional Transfers: Regression Discontinuity Design with Heterogeneous Treatment Effects

Researchers often estimate average treatment effects of programs without investigating heterogeneity across units. Yet, individuals, firms, regions, or countries vary in their ability, e.g., to utilize transfers. We analyze Objective 1 Structural Funds transfers of the European Commission to regions of EU member states below a certain income level by way of a regression discontinuity design with systematically heterogeneous treatment effects. Only about 30% and 21% of the regions – those with sufficient human capital and good-enough institutions – are able to turn transfers into faster per-capita income growth and per-capita investment. In general, the variance of the treatment effect is much bigger than its mean.