Abstract
We characterize the optimal prize allocation, namely the allocation that maximizes a group’s effectiveness, in a model of contests. The model has the following features: (i) it allows for heterogeneity between and within groups; (ii) it classifies contests as “easy” and “hard” depending on whether the marginal costs are concave or convex. Thus, we show that in an “easy” contest the optimal prize allocation assigns the entire prize to one group member, the most skilled one. Conversely, all group members receive a positive share of the prize when the contest is “hard” and players have unbounded above marginal productivities. If the contest is “hard” and the marginal productivities are bounded above, then only the most skilled group members are certain of receiving a positive share of the prize for any distribution of abilities. Finally, we study the effects of a change in the distribution of abilities within a group. Our analysis shows that if the contest is either “easy” or a particular subset of “hard”, then the more the heterogeneity within a group, the higher its probability of winning the prize.