This paper analyzes structural transformation on Israeli family farms using longitudinal village-level data for the years 1992-2001, with particular emphasis on the effects of the 1985 debt crisis and the subsequent 1992 debt settlement legislation. Dynamic panel GMM estimation reveals a negative effect of the amount of debt, and a positive effect of reaching a debt restructuring agreement, on farm size. Reaching an agreement also had an indirect negative effect on the shift to off-farm work. No significant effect was found on farm exits. This implies that the debt restructuring legislation accomplished its goal of rehabilitating the farm sector, at least to some extent.


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