In this paper, we design a distributed incentive mechanism for mesh-pull P2P live streaming networks. In our system, a video is encoded into layers with lower layers having more importance. The system is heterogeneous with peers having different uplink bandwidths. We design a distributed protocol in which a peer contributing more uplink bandwidth receives more layers and consequently better video quality. Previous approaches consider single-layer video, where each peer receives the same video quality no matter how much bandwidth it contributes to the system. The simulation results show that our approach can provide differentiated video quality commensurate with a peer's contribution to other peers, and can also discourage free-riders. Furthermore, we also compare our layered approach with a multiple description coding (MDC) approach, and conclude that the layered approach is more promising, primarily due to its higher coding efficiency.