Too much meritocracy (accuracy of performance ranking in contests), can be a bad thing: in contests with homogeneous agents, it reduces output and is Pareto inefficient; with sufficiently heterogeneous agents, discouragement & complacency effects further reduce the benefits of meritocracy

Morgan, John and Tumlinson, Justin and Várdy, Felix, The Limits of Meritocracy (July 20, 2018). Available at SSRN: https://ssrn.com/abstract=3216950

Abstract: We show that too much meritocracy, modeled as accuracy of performance ranking in contests, can be a bad thing: in contests with homogeneous agents, it reduces output and is Pareto inefficient. In contests with sufficiently heterogeneous agents, discouragement and complacency effects further reduce the benefits of meritocracy. Perfect meritocracy may be optimal only for intermediate levels of heterogeneity.

Keywords: Contest Theory; Mechanism Design; Auctions
JEL Classification: D82; D44