Does development aid affect recipient countries' state capacity? In this study, we focus on two specific types of state capacity, namely (1) the ability to provide information to third parties and (2) to discriminate between different kinds of third-party inquiries. Our theory predicts that, when aid funds are distributed in a competitive fashion and incentivize expansions in administrative personnel, aid may bring about a higher bureaucratic capacity equilibrium. We assess our theoretical argument by analyzing the effect of EU structural funds—arguably the world's most extensive development assistance program—on building local government capacity in the largest aid recipient country, post-communist Poland. Through a randomized survey with more than 2,400 municipal administrations in Poland, we find that local administrations which have benefited more from EU funding, have developed higher levels of discrimination capacity. At the same time, we do not find sufficient evidence for increases in information provision capacity.
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