Gemara

Nazir 2b (Beraisa): "Zeh Keli v'Anvehu (I will beautify Him)" - be beautiful in front of Him with Mitzvos, e.g. a beautiful Sukah, Lulav, Tzitzis, and Sefer Torah wrapped in nice silk!

Bava Kama 9a (R. Zeira citing Rav Huna): One must spend up to a third for Mitzvos.

Question: What does this mean?

Suggestion: One must spend a third of his wealth to fulfil a Mitzvah.

Rejection: It is unreasonable that if he encounters three (expensive) Mitzvos, he must exhaust all his wealth!

Answer (R. Zeira): One must spend an extra third to beautify a Mitzvah.

Question (Rav Ashi): Is this an inner third (of the cost of the plain Mitzvah), or an outer third (of the beautified Mitzvah)?

This question is unresolved.

Rishonim

Rif and Rosh (Sukah 16a and 3:12): R. Zeira taught that one must spend an extra third to beautify a Mitzvah.

Rosh: If one bought a Lulav, and found a nicer one, he should add a third of the price of the first to exchange it for the nicer one.

Ran (DH ul'Hidur): The Rif did not say whether one adds an inner third or an outer third, in order that we will be stringent. This is better.

Rosh (Bava Kama 1:7): If one found a Kosher Esrog the size of a nut, he should spend an extra third to buy a nicer one. He is not obligated to buy an Esrog for a third more than the one he wanted to buy.

Question: In Sukah, the Rosh obligates one to buy a nicer one if he finds one!

Answer (Taz OC 656:1): If one never indicated how much he wants to spend, he must add a third to the Shi'ur that Chachamim fixed. If not, there is no limit, for he can always find nicer ones! If he bought one, for him this is like the Shi'ur that Chachamim fixed for everyone, and he must add a third to this.

Rosh (ibid.): We did not resolve whether one adds an inner or an outer third. An inner third suffices. 'If he encounters three Mitzvos, will he give all his money?!' shows that one need not spend so much for one Mitzvah, even if it is Overes (the time to do it will pass). The Gemara considers it Guzma (extreme) that R. Gamliel, the Nasi, spent 1000 Zuz for an Esrog. Chachamim enacted not to give more than a fifth of one's money to Tzedakah.

Question (Yam Shel Shlomo, ibid.): Since the question was unsettled, we should be stringent about a Safek mid'Oraisa! Perhaps the Rosh holds that it is mid'Rabanan. I think that one should be stringent, like the Ran inferred from the Rif's omission of the question.

Tosfos (Bava Kama 9b DH Ad): If one found a Kosher Esrog the size of a nut, like the Shi'ur that Chachamim fixed, and another a third bigger, he should buy the latter.

Nimukei Yosef (Bava Kama 4a DH Ad): Up to an extra third, a person must spend from his own, i.e. if he toiled for his money and his budget is tight.

Yam Shel Shlomo (ibid.): If one is barely subsisting, he need not add a third. Perhaps he is totally exempt from the Mitzvah, even if it is Overes, for this is like a fortune for him, except for Ner Chanukah and the four cups of wine.

Poskim

Shulchan Aruch (OC 656:1): If one bought a minimally Kosher Esrog, e.g. it is exactly the size of an egg, and later he found a bigger one, it is a Mitzvah to add up to a third of the price of the first to exchange it for the nicer one.

Mishnah Berurah (1): This opinion holds that the Mitzvah to buy a bigger one is lest a small one become smaller than the Shi'ur. The next opinion holds that it is always a Mitzvah to spend an extra third to beautify any Mitzvah.

Beis Yosef (DH v'Nireh): The SMaG and Rosh came to teach about Hidur Mitzvah, not about the minimal size of an Esrog. The SMaG mentioned a nut and an egg, the Shi'urim of R. Meir and R. Yehudah, to teach that each Tana obligates adding a third to what he says is the minimum. Maharik (62) says that the Rosh holds that even R. Yehudah exempts one who bought an Esrog like an egg from getting a bigger one. This is wrong. If so, the Rosh would not have illustrated Hidur Mitzvah through Esrog, since we hold like R. Yehudah and the Mitzvah of Hidur does not apply. According to Rashi, the Mitzvah is only when buying. If he already bought one, he need not spend more for a nicer one, even if it is very nice and is cheap.

Darchei Moshe (1): The Poskim rule unlike Rashi.

SMaG (cited in Beis Yosef DH u'SMaG): Rabbeinu Tam did not want to say that one must spend an extra third for a nicer Sefer Torah or Esrog, for one will always find a nicer one. Rather, if one bought an Esrog the size of a nut or an egg, and found a nicer one, he should pay up to a third more. If he initially bought one bigger than an egg, he need not add.

Yam Shel Shlomo (Bava Kama 1:24): If one finds 10 Esrogim, each a third nicer than the other, must he spend all his wealth?! Rather, R. Tam's opinion is primary. In Sukah, the Rosh explained according to the Rif, that one must pay more for a nicer Mitzvah. Here, where the Halachah of Hidur Mitzvah was taught, the Rosh gave his own opinion. This is why the Tur brought only R. Tam's opinion. This is only regarding Esrog, about which it says "Hadar (beautiful)". The minimal Kosher size is not Hadar. One need not add a third to the minimal size for a Shofar or other Mitzvos. In any case it is good to get a nice one, according to one's generosity.

Rebuttal (Magen Avraham 2,7): The Gemara said Stam (without specifying) that one must beautify Mitzvos! Rashi discusses two Sifrei Torah. One must add only if the new one is a third nicer than the previous. Therefore, one will not spend all his money.

Levushei Serad (3): R. Tam requires adding a third only to the minimal size. The Magen Avraham says that we learn from Rashi that the Mitzvah to add applies to all Mitzvos, even according to R. Tam.

Magen Avraham (4): If the seller does not consent to exchange, only to sell, he need not buy, since he already bought.

Shulchan Aruch (ibid.): Some say that if he finds two Esrogim to buy, and one of them is nicer than the other, he should buy the nicer one if the price difference is no more than a third of the other.

Source (Beis Yosef DH Kaneh): Rashi (Bava Kama 9b DH b'Hidur) says that if one found two Sifrei Torah to buy, he should add a third of the price to buy the nicer one.

Kaf ha'Chayim (17): It seems that neither opinion requires one who bought an Esrog bigger than an egg to exchange it for a nicer one. However, the Rosh, Gra and Taz obligate doing so. The Magen Avraham says that perhaps the Shulchan Aruch holds like the Rosh.

Kaf ha'Chayim (18): One must add a third from an Esrog that one could bless on without Safek. Hidur depends on what people in the area consider nice.