Exploiting Naïvete about Self-Control in the Credit Market
Due to the nonredundancy
condition, the competitive-equilibrium contracts we derive exclude most options by assumption;
in particular, nonsophisticated borrowers’ only option to change the repayment schedule will be
to change it by a lot for a large fee. As is usually the case in models of nonlinear pricing, the same
outcomes can also be implemented by allowing other choices, but making them so expensive that
the borrower does not want to choose them. In fact, this is how it works in the real-life examples
discussed below, where deferring even small amounts of repayment carries disproportionately
large fees....
