Contests with Externalities

This paper examines contests in which aggregate efforts generate positive externalities to participants. In such contests the equilibrium effort may exceed or fall short of the socially optimal level of effort. This paper derives the relationship between the equilibrium effort, the size of prize, and the socially optimal level of effort. The equilibrium effort proves to exceed the social optimum when it is less than the prize times the exponent R of the Tullock (1980) contest-success function. On the other hand, when the equilibrium effort is greater than the prize times the exponent R, it indeed falls short of the social optimum.