This study contributes to the empirical understanding of foreign aid and income inequality by investigating the
effect of foreign aid on income inequality in recipient countries, based on the disaggregation of foreign aid
figures. For this purpose we include four main sectoral foreign aid (social sector, economic sector, production
sector and multi sector) as determinants of income inequality. This study utilized the Generalized Method of
Moments (GMM) method for a panel of 75 foreign aid recipient countries covering the period of 1995-2009. The
results indicated that different sectoral foreign aid affected income inequality differently. Aid to economic sector
has significant impact in reducing income inequality. In contrast, aid to multi sector significantly increased
income inequality.