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Does foreign aid reduce terrorism? We examine whether foreign aid decreases terrorism by analyzing whether aid targeted toward certain sectors is more effective than others. We use the most comprehensive databases on foreign aid and transnational terrorism—AidData and ITERATE—to provide a series of statistical tests. Our results show that foreign aid decreases terrorism especially when targeted toward sectors, such as education, health, civil society, and conflict prevention. These sector-level results indicate that foreign aid can be an effective instrument in fighting terrorism if allocated in appropriate ways.