(In)efficient public-goods provision through contests

We ask if awarding multiple prizes in a contest can be used to provide efficient incentives for the production of a public good with heterogeneous producers. With two types of individuals, efficiency can only be guaranteed if the following conditions are met: (i) the contest designer can use at least two prize spreads, (ii) there is a sufficient number of individuals of each type, (iii) low-productivity types don’t have much stronger preferences for the public good and (iv) the contest designer can enforce non-monotonic prize schemes. Our findings show that the challenges from heterogeneity can be overcome by an adequate choice of prizes under the above conditions, but that heterogeneity can also severely limit the usefulness of relative-performance measures. Copyright Springer-Verlag Berlin Heidelberg 2014