The implications of financial cooperation in Israel's semi-cooperative villages

Financial cooperation, through credit sharing and co-signing of debts, was a source of strength for Israel's semi-cooperative moshavim in the early decades of their development. But such cooperation entails a potential 'free-rider' problem when farmers' borrowings are uncoordinated, and recent events in Israel have demonstrated the severe implications it can have. This paper presents a theoretical analysis of the externalities generated by financial cooperation, and tests its conclusions empirically using Israeli data. Simulation results indicate that the potential instability of financial cooperation is aggrevated when the moshav population is heterogeneous.