While the effects of relaxing exclusivity warrant further research, in general it would not eliminate our main points regarding nonsophisticated borrowers. Even if borrowers had access to a competitive market in period 1, our results remain unchanged so long as the original firm can include in the contract a fee—such as the prepayment penalties in subprime mortgages—for refinancing with any firm in the market. If firms cannot postulate such a fee for refinancing on the competitive market, then in our three-period setting a borrower will always avoid repaying more than expected. But as predicted by O’Donoghue and Rabin (2001) and is consistent with evidence in.
