Mapping Center Answer:

Great question and it's an interesting effect. There are a few steps involved in ArcMap to be able to replicate the effect.  First, you need to use the Buffer tool to create an internal buffer of your polygon feature class.  You do this by specifying a negative buffer value.  You then need to use the Euclidean Distance tool on the buffer feature class you just created which creates a raster dataset with cell values that relate to distance away from the polygon features.  Since you're only going to need a small portion of this raster data, use the Extract by Mask tool with the original polygon feature class to clip out the raster to the extent and shape of the original polygons.  What you now have is, effectively, a DEM which has a flat plateau across most of the polygon and descends towards the boundaries of each polygon.

Now you can use the Hillshade tool to create a hillshaded dataset of the clipped raster dataset on which you then invert the default symbology.  To get the final effect, you place the hillshade layer beneath the original polygon layer and apply transparency to the original polygon layer.  This will give you the effect you are after.  You may need to experiment with distances for your internal buffer, euclidean distance, hillshade and transparency to get look of the effect you are after.

We will be working this question into a Mapping Center blog in the near future as it's a great effect and one that we're sure others will also want to try out.