The consequences of mutually secured debts: The case of Israeli moshavim

Abstract

This paper explores the long-run consequences of the farm’s own debt and the moshav’s average debt on the farm household investment in productive capital stock, borrowing and consumption. In particular, the analysis focuses on the financial externalities that might arise from the moshav’s organizational principle of mutual responsibility for members’ debts. These externalities can have a considerable adverse effect on the capital stock and borrowing of the more efficient farms, and hence on their productive activity. These effects are studied within the framework of an optimal control model and summarized by a number of optimality conditions. The effects of the individual member’s position and the moshav’s financial position on the individual member’s investment and borrowing are estimated and tested in two cross-section regression analyses, which also take into account observed variations in characteristics among the family farms.