3.2 Econometric Methodology
This study conducted the General Method of Moments (GMM) estimation procedure to examine the impact of
sectoral aid on income inequality. This technique allows us to eliminate time invariant country-specific effects
and to control for the endogeneity of the explanatory variables. We assume that all explanatory variables are
potentially endogenous. Time-invariant variables are eliminated from (1) since under our estimator the data is
first differenced. This study follows the GMM system which is developed by Blundell and Bond (1998). The
consistency of the GMM estimator depends on whether lagged values of the explanatory variables are valid
instruments in the regression.