Cohesion Policy and Institutional Quality Impact: Does Urban–Rural Classification Matter?

Abstract This study examines the impact of Cohesion Policy, and institutional quality, on regional economic performance across NUTS2 regions in 27 EU member states from 2007 to 2022. Average per capita Cohesion Policy payments are much higher in less developed regions, showing the policy focus on supporting lagging areas. Furthermore, the analysis groups regions as urban, rural and intermediate at the NUTS2 level to reflect key territorial differences and better assess how Cohesion Policy impacts vary across distinct development challenges. However, very low institutional quality in these regions may limit the effectiveness of this financial support. Using a two‐step system generalised method of moments approach, the analysis finds that Cohesion Policy transfers have a positive impact on regional economic performance, with notable variation across regional types. The interaction between regional typologies and funding indicates that the policy is particularly effective in less developed, rural and intermediate regions, where structural disadvantages are more pronounced. Institutional quality plays a moderating role in this relationship and emerges as a key factor in enhancing Cohesion Policy effectiveness. To increase the impact of Cohesion Policy in lagging and rural regions, financial support should be complemented with efforts to improve institutional quality.