Joint Liability Borrowing and Suicide

This paper argues that joint liability borrowing may put too much pressure on the borrower, mainly through the stigma caused by repayment failure, eventually leading to the borrowers suicide. The paper states that:

• In Japan, the co-guarantor system is common for small and medium borrowing without collateral;
• This joint-liability arrangement mitigates adverse selection and moral hazards in credit markets through peer screening and monitoring mechanisms;
• However, when the borrower fails to repay her/his debt, this mechanism may put too much pressure on the borrower, leading to the suicide of the borrower.

The paper presents a model of joint liability borrowing that facilitates credit market transaction ex ante, but may induce suicides ex post in the bad state. This model comprises a two-stage framework where:

• In stage one, an individual makes a decision on whether to engage in joint liability borrowing of a fixed amount “L” from some creditor;
• In stage two, depending on the realization of the income, the individual makes decision on whether to end his life or not.

The paper concludes by introducing supportive evidence from a suicide survey in Japan.