To enable us to focus on the contracts accepted by consumers, we suppress the strategic interaction between firms and define equilibrium directly in terms of the contracts that survive competitive Since a borrower’s behavior in period 0 can depend only on ˆ β, the competitive equilibrium will be a set of contracts {(ci, i)}i∈{2, , I } for the possible ˆ β types β2 through For a firm to calculate the expected profits from a contract, and for a borrower to decide which of the contracts available on the market to choose, market participants must predict how a borrower will behave if she chooses a.
