Income inequality reflects resource allocations, and has important implications for public policy and institutional design. This paper investigates the factors determining inequality. This is especially relevant in Chile where income distribution has not improved in the past decades. We disaggregate income into different components, differentiating between urban and rural populations, and assesses the contributions of these sources to total income inequality, as measured by the Gini and generalized entropy inequality measures. Results indicate that important factor components explaining income distribution are education, type of occupation, and type of health system. In addition, the effects of these components differ significantly between urban and rural population