Optimal Feedback in Contests

Abstract

We derive an optimal dynamic contest for environments where effort can be monitored only through a coarse, binary performance measure and the principal chooses prize-allocation and termination rules together with a real-time feedback policy for the contestants. The optimal contest takes a stark cyclical form: contestants are kept fully apprised of their own successes, and at the end of each fixed-length cycle, if at least one agent has succeeded, the contest ends and the prize is shared equally among all successful agents irrespective of when they succeeded; otherwise, the designer informs all contestants that nobody has yet succeeded and the contest resets. Applications include promotions, innovation contests, and proof-of-work protocols.