The Limits of Equality: Insights From the Israeli Kibbutz

The Israeli Kibbutzes, which are voluntary communities based on income equality, are puzzling since they might unravel due to moral hazard and adverse selection. Yet Kibbutzes persisted for most of the 20th century. How did voluntary communities based on income equality persist within a capitalist environment? What level of equality can they sustain? This paper employs unique data sets at both the Kibbutz-level and the individual-level to analyze Kibbutzes’ choices of their level of income equality, their organizational form and their members’ decisions of whether to leave the Kibbutz. A wealth shock that hit Kibbutzes differentially provides the “natural experiment” that allows me to identify the determinants of the level of equality and the exit rates in each Kibbutz. The main findings are that the most productive members are more likely to leave, that common wealth is a lock-in device that makes exit costly, and that wealthier Kibbutzes are more likely to choose a higher level of income equality. All the patterns in the data are consistent with a simple model of optimal insurance under limited commitment of members to stay in their Kibbutz once their type is realized. This stands in contrast to the view of Kibbutzes as primarily ideological entities. At a broader level, the study of Kibbutzes reveals how potential moral hazard and negative selection determine contractual relationships in organizations such as partnerships and cooperatives. ∗Stanford University. I am grateful to Joel Mokyr, Fabio Braggion, Eddie Dekel, Adeline Delavande, Zvi Eckstein, Liran Einav, Joe Ferrie, Avner Greif, Reuben Gronau, Timothy Guinnane, Nisan Langberg, Charles Manski, Deirdre McCloskey, Jacob Metzer, Chiaki Moriguchi, Rob Porter, Bill Rogerson, Kathy Spier and Luis Vasconcelos for helpful discussions and comments. Special thanks to Icho and Bracha Abramitzky for their invaluable assistance with data collection and entry. Financial support from the Northwestern Dissertation Dean Fellowship, Northwestern’s center of Jewish Studies, the Economic History Association Dissertation Award and the Mellon Fellowship is gratefully acknowledged.