New research reveals why one-size-fits-all contracts dominate markets.
The study looked at how contracts can be designed when there is limited liability and different levels of risk. They found that in certain situations, it is best to have one contract that fits all ability types, rather than different contracts for different people. This type of contract pays a bonus when the most likely outcome happens, and limited liability otherwise. This helps explain why we often see the same contracts being used in markets like franchising and labor markets.