This paper shows that joint liability borrowing may put too much pressure on the borrower, mainly through the stigma in case of repayment failure, and leads to a vexing outcome|the suicide of the borrower. We provide a model of joint liability borrowing which facilitates credit market transaction ex ante but may induce suicides ex post in the bad state. We introduce some supportive evidence from a suicide survey in Japan.

Joe Chen

Yasuyuki Sawada

Yun Jeong Choi

English

Research Papers in Economics

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CIRJE-F-534
Joint Liability Borrowing and Suicide
Joe Chen
University of Tokyo
Yun Jeong Choi
University of Tokyo
Yasuyuki Sawada
University of Tokyo
December 2007Joint Liability Borrowing and Suicide¤
Joe Chen
Faculty of Economics
University of Tokyo
7-3-1 Hongo, Bunkyo-ku,
Tokyo, 113-0033, Japan
joechen@e.u-tokyo.ac.jp
Yun Jeong Choi
Faculty of Economics
University of Tokyo
7-3-1 Hongo, Bunkyo-ku,
Tokyo, 113-0033, Japan
yun@e.u-tokyo.ac.jp
Yasuyuki Sawaday
Faculty of Economics
University of Tokyo
7-3-1 Hongo, Bunkyo-ku,
Tokyo, 113-0033, Japan
sawada@e.u-tokyo.ac.jp
December 16, 2007
Abstract
This paper shows that joint liability borrowing may put too much pressure on
the borrower, mainly through the stigma in case of repayment failure, and leads to
a vexing outcome|the suicide of the borrower. We provide a model of joint liabil-
ity borrowing which facilitates credit market transaction ex ante but may induce
suicides ex post in the bad state. We introduce some supportive evidence from a
suicide survey in Japan.
Keywords: Joint Liability; Suicide; Stigma
JEL classi¯cation: G21; I30; J17
¤We gratefully acknowledege comments from Hidehiko Ichimura, Dean Karlan, Edward Miguel, and
Jonathan Morduch. This research is supported ¯nancially by the Research Center for the Relation-
ship between Market Economy and Non-market Institutions (CEMANO), the 21st Century Center of
Excellence (COE) Program of the Graduate School of Economics at the University of Tokyo.
yCorresponding author. Mailing address: Faculty of Economics, University of Tokyo, 7-3-1 Hongo,
Bunkyo-ku, Tokyo, 113-0033, Japan. Tel.: +81 3 5841 5572; Fax: +81 3 5841 5521. E-mail address:
sawada@e.u-tokyo.ac.jp
11 Introduction
In Japan, co-guarantor system is common in people's daily life. In particular, for small
and medium borrowing without collateral, co-guarantor contract is a standard practice
used by creditors and borrowers to facilitate credit market transactions. Under this
contract, a borrower is required to ¯nd a co-guarantor, usually a close family member
or a very close friend, who is jointly liable to the full extent of the amount of his debt.
This Japanese co-guarantor system or joint liability contract has similar features as the
micro-credit program initiated by Dr. Muhammed Yunus of the Grameen Bank.
The \group-lending" contract in micro-credit programs e®ectively makes the peers
of a borrower as co-guarantors of his loan (Armend¶ ariz de Aghion and Morduch, 2005).
This joint liability arrangement mitigates adverse selection and moral hazard in credit
markets through the peer screening and monitoring mechanisms, respectively (Ghatak,
1999; Stiglitz, 1990). Furthermore, it weakens incentives of strategic defaults through
informal enforcement mechanism or the social collateral as named by Besley and Coate
(1995).1
However, this study points out that, in cases when the borrower fails to repay his
debt, this informal enforcement mechanism may put too much pressure on the borrower
through the \stigma" or \social penalty" as in Besley and Coate (1995), leading to
a vexing outcome|the suicide of the borrower. The link between strong stigma and
suicides has also been documented in others ¯elds. Besley (p.2179, 1995) cited anthro-
pologist Ardener's (1964) observation that the stigma through social sanction may result
in suicides of those who failed in installments in rotation savings and credit associations
(ROSCAs). West (2003) also pointed out that many people in Japan seem to believe
that killing oneself creates less of a burden to the family members than having them live
with a debtor.
This study provides a model of joint liability borrowing which facilitates credit market
1Yet, recently, a couple of new studies emerged which challenge the validity of e®ective enforcement
mechanisms of the joint liability lending [Che (2002); Kono (2006)].
2transaction ex ante but may induce suicides ex post in the bad state due to stigma. Some
supportive evidence from a suicide survey is also presented.
2 The Model
Consider a two-stage framework where an individual makes decision on whether to engage
in joint liability borrowing of a ¯xed amount L from some creditor in stage one, and
depending on the realization of the income, the individual makes decision on whether to
end his life in stage two. There are two states of nature in stage two: with probability p,
it is a \good" state (G), and the incomes of the borrower (D) and co-guarantor (C) are
ID
G and IC
G respectively; with probability 1 ¡ p, it is a \bad" state (B), and the incomes
of the borrower and co-guarantor are ID
B and IC
B respectively. Let Ii
G > Ii
B 8 i 2 fD;Cg.
Regardless of the state of nature, borrowing results in a net bene¯t of ±L > 0. It is
assumed that, in the good state, ID
G + ±L > 0 so that the borrower can pay o® his debt.
There is no strategic default; the borrower always pays o® the debt whenever possible.
Nonetheless, in the bad state, ID
B + ±L < 0, the individual cannot pay o® the loan, and
the co-guarantor is responsible for the remaining debt. Note that the co-guarantor acts
passively whenever called upon to sign.
A borrower's utility function is represented by U(¢;V (¢)), where V (¢) is the utility
of the co-guarantor. This setup assumes that a borrower concerns the welfare of his
co-guarantor, therefore, making the co-guarantor repay his debt reduces not only the
utility of the co-guarantor but also that of the borrower. Let b be a random variable
representing the individual's \taste" for suicide. Following Hamermesh and Soss (1974),
an individual makes suicide decisions when the utility level, U(¢;V (¢)) < b:
3Borrowing and Suicide Decisions
Whether to engage in joint liability borrowing depends on the comparison of the expected
utility of borrowing versus not. An individual borrows when:
pU
¡
I
D
G + ±L;V (I
C
G)
¢
+ (1 ¡ p)max
©
U(¼(I
D
B + ±L);V (I
C
B + I
D
B + ±L));b
ª
> pU(I
D
G;V (I
C
G)) + (1 ¡ p)max
©
U
¡
I
D
B;V (I
C
B)
¢
;b
ª
;
or,
p
1 ¡ p
£
U
¡
I
D
G + ±L;V (I
C
G)
¢
¡ U(I
D
G;V (I
C
G))
¤
+
£
max
©
U(¼(I
D
B + ±L);V (I
C
B + I
D
B + ±L));b
ª
¡ max
©
U
¡
I
D
B;V (I
C
B)
¢
;b
ª¤
> 0:
Note that an individual, borrowing or not, does not consider suicide an option in the
good state, and will never commit suicide ex ante; i.e., before the realization of the state
of nature. In the bad state, the realized income of a borrower is negative, ID
B + ±L < 0.
The co-guarantor is then responsible for this ¯nancial gap and his net income becomes
IC
B + ID
B + ±L. The borrower is left with a money-measured \stigma", ¼(ID
B + ±L) · 0,
which is an increasing function of the ¯nancial gap. As the ¯nancial gap gets wider, i.e.,
ID
B + ±L becomes more negative, the magnitude of the stigma gets larger.
Depending the results of the maximum operations, there are four cases:
² Case SS: max
©
U(¼(ID
B + ±L);V (IC
B + ID
B + ±L));b
ª
= max
©
U
¡
ID
B;V (IC
B)
¢
;b
ª
= b
² Case NS: max
©
U(¼(ID
B + ±L);V (IC
B + ID
B + ±L));b
ª
= U(¼(ID
B +±L);V (IC
B +ID
B +
±L)), and max
©
U
¡
ID
B;V (IC
B)
¢
;b
ª
= b.
² Case SN: max
©
U(¼(ID
B + ±L);V (IC
B + ID
B + ±L));b
ª
= b; and
max
©
U
¡
ID
B;V (IC
B)
¢
;b
ª
= U
¡
ID
B;V (IC
B)
¢
.
4² Case NN: max
©
U(¼(ID
B + ±L);V (IC
B + ID
B + ±L));b
ª
= U(¼(ID
B +±L);V (IC
B+ID
B +
±L)); and max
©
U
¡
ID
B;V (IC
B)
¢
;b
ª
= U
¡
ID
B;V (IC
B)
¢
.
Consider the suicide decision of an individual who borrows (a borrower) in the ¯rst
stage and the state of nature is bad. Based on the threshold decision rule, an individual
commits suicide in Cases SS and SN, but not in Cases NS and NN.
Among the not committing suicide cases, Case NN is trivial in that a borrower lives
with the stigma, and would not commit suicide even if he had not borrowed in the ¯rst
stage. However, in Case NS, a borrower lives with stigma, and would not commit suicide
if he had not borrowed in the ¯rst stage. Hence, in Case NS, joint liability borrowing
reduces suicide.
Among the committing suicide cases, Case SS is trivial in that a borrower would kill
himself even if he had not borrowed in the ¯rst stage. However, in Case SN, a borrower
commits suicide and he would not choose to do so if he had not borrowed in the ¯rst
stage. The borrower in Case SN chooses to end his life because of the stigma of having
the co-guarantor to take the responsibility of his ¯nancial gap, and because of the utility
lost that he incurs upon the co-guarantor. Hence, in Case SN, joint liability borrowing
increases suicide.
In order to grasp an intuition behind Case SN, suppose a risk-neutral linear utility
function. When the state of nature is bad, we postulate that U(¼(ID
B + ±L);V (IC
B +
ID
B + ±L)) = ®¼(ID
B +±L)+ ®V(IC
B + ID
B + ±L) and U(ID
B;V (IC
B)) = ®¼ID
B +®VIC
B. Note
that non-negative parameters, ®¼ and ®V, represent the degrees of social stigma and
altruism, respectively. It is straightforward to show that when ®¼ + ®V > 1, i.e., when
social stigma and/or altruism are su±ciently strong, there exists p 2 [(ID
B + ®VIC
B ¡
b)=(ID
B + ± + ®VIC
B + ®VIC
G ¡ b);1] such that an individual borrows but commits suicide
in the realization of the bad state.2
Joint liability borrowing has e®ects on suicides in Cases NS and SN, but not in the
other two cases. Whether a real world situation is Case NS or Case SN depends on
2Case NS arises when ®¼ + ®V < 1.
5the magnitude of the stigma and the degree of altruism. In countries such as Japan
and South Korea where the degree of family and/or social connectedness is high, we
conjecture that the magnitude of stigma and the degree of altruism are both high, and
Case SN describes such a scenario properly. For suicide prevention, Case SN is the
target. Helping borrowers that are ¯nancially constrained is the essential task of suicide
prevention.
3 Suicide Survey
In 1998, the total number of suicides in Japan jumped by 34.7%, from 24,391 in the
previous year to 32,863. In particular, the number of suicides of self-employed increased
by 43.8%. The Cabinet O±ce (2007) and Watanabe et al. (2006) have identi¯ed the
credit crunch happened in 1997 as one of the main causes of the dramatic increase in the
number of suicides of the self-employed.3 In the case that self-employed people depends
more on borrowing under co-guarantor contracts, this study provides an explanation
of how a credit crunch may lead to a sharp increase in the number of suicides of the
self-employed. A recent survey provides some supporting evidence of this interpretation.
Lifelink, a Tokyo-based non-for-pro¯t organization, and the authors are conducting
a survey on bereaved families of suicide victims. A 101 people pilot survey with detailed
questions has been completed in September, 2007.4
One result related to this study is that a larger fraction of self-employed people
commits suicide, possibly due to the joint liability contract. 45.5% of self-employed (10
out of 22) committed suicide because of multiple debt and/or the co-guarantor problem,
as opposed to 12.7% of the non-self-employed (10 out of 79). About a third of the self-
employed suicides (7 out of 22) was due to the co-guarantor problem, as opposed to only
3According to Woo (2003), the collapse of mega-banks in 1997 caused a crisis in the domestic ¯nancial
sector which is often referred to as a typical example of "credit crunch".
4The on-going nationwide survey plans to collect data from the bereaved family members of 1,000
suicide victims. For detail information of this survey, please refer to the homepage of Lifelink,
http://www.lifelink.or.jp/.
66% of the non-self-employed suicides (5 out of 79).
References
[1] Ardener, S., 1964, The Comparative Study of Rotating Credit Associations, Journal
of the Royal Anthropological Society of Great Britain and Ireland, 92(2):201-229.
[2] Armend¶ ariz de Aghion, Beatriz and Jonathan Morduch, 2005, The Economics of
Micro¯nance, Cambridge: MIT Press.
[3] Besley, Timothy, 1995, Savings, Credit and Insurance, Handbook of Development
Economics, Volumne III, edited by J. Behrman and T.N. Srinivasan, p.2123-2207.
[4] Besley, Timothy and Stephen Coate, 1995, Group Lending, Repayment Incentives,
and Social Collateral, Journal of Development Economics, 46(1), 1-18.
[5] Cabitnet O±ce, 2007, Whitepaper on Suicide 2007, the Cabinet O±ce, Government
of Japan.
[6] Che, Yeon-Koo, 2002, Joint Liability and Peer Monitoring under Group Lending,
Contributions to Theoretical Economics, 2(1), Article 3.
[7] Ghatak, Maitreesh, 2000, Screening by the Company You Keep: Joint Liability
Lending and the Peer Selection E®ect, Economic Journal, 110, 601-631.
[8] Kono, Hisaki, 2006, Is Group Lending A Good Enforcement Scheme for Achieving
High Repayment Rates? Evidence from Framed Field Experiments in Vietnam,
Institute of Developing Economies Discussion Paper, No.61.
[9] Stiglitz, Joseph, 1990, Peer Monitoring and Credit Markets, World Bank Economic
Review, 4 (3), 351-366.
7[10] Watanabe, R., M. Furukawa, R. Nakamura, and Y. Ogura., 2006. Analysis of the
Socioeconomic Di±culties A®ecting the Suicide Rate in Japan, Kyoto Institute of
Economic Research Discussion Paper No. 626.
[11] West, M., 2003, Dying to Get Out of Debt: Consumer Insolvency Law and Suicide
in Japan, The John M. Olin Center for Law and Economics Working Paper Series,
No. 21, University of Michigan Law School.
[12] Woo, D., 2003, In Search of "Credit Crunch": Supply Factors behind the Credit
Slowdown in Japan, Journal of Money, Credit and Banking 35(6), 1091-1038.
8

Dying to Get Out of Debt: Consumer Insolvency Law and Suicide

Group Lending, Repayment Incentives, and Social Collateral,

In Search of &quot;Credit Crunch&quot;: Supply Factors behind the Credit Slowdown in Japan,

Is Group Lending A Good Enforcement Scheme for Achieving High Repayment Rates? Evidence from Framed Field Experiments in Vietnam, Institute of Developing Economies Discussion

Peer Monitoring and Credit Markets, World Bank Economic Review,

Savings, Credit and Insurance,

Screening by the Company You Keep: Joint Liability Lending and the Peer Selection E®ect,

The Comparative Study of Rotating Credit Associations,

The Economics of Micro¯nance,

"Joint Liability Borrowing and Suicide"

http://www.cirje.e.u-tokyo.ac.jp/research/dp/2007/2007cf534.pdf

"Joint Liability Borrowing and Suicide"

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