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Incentives and Effort in a Cooperative Enterprise: The Case of the Israeli Kibbutz

The compensation system of the Israeli kibbutz, a form of cooperative enterprise, was traditionally need-based and unrelated to effort exerted. In the early 1990s a new model of the kibbutz emerged. The new model was partly based on effort, which resembles the optimal sharing rule proposed by Sen (1966) for circumstances where social consciousness is less than perfect. This transition from need-based to effort-based compensation on such a large scale presented a rare opportunity to test the empirical implications of Sen's model. In this study we compared the group of kibbutzim that chose to adopt the new model (denoted the new kibbutzim) to the control group of those that chose not to adopt it (denoted the traditional kibbutzim). In accordance with Sen's model, we find a significant increase in average effort exerted by members of the new kibbutzim in the period immediately preceding the change year and in the post-change periods, while no such change is observed in the traditional kibbutzim. A similar pattern is found in average operating income per member of the two groups of kibbutzim.