This article investigates the causal effect of foreign aid on income distribution. We rely upon the fact that, starting from 1987, eligibility for aid from the International Development Association has been according partly to whether a country’ per capita income is below a certain threshold, enabling a regression discontinuity design. The empirical evidence demonstrates that for those countries receiving foreign aids, their income distribution is significantly improved. In addition, we show that foreign aid lowers income inequality possibly through boosting income shares held by the lower 80% at the expense of decreasing income share held by the highest 20%.
