Abstract
This article analyses the allocation of prizes in contests. While existing models consider a single contest with an exogenously given set of players, in our model several contests compete for participants. As a consequence, prizes not only induce incentive effects but also participation effects. We show that contests that aim to maximize players’ aggregate effort will award their entire prize budget to the winner. In contrast, multiple prizes will be awarded in contests that aim to maximize participation and the share of the prize budget awarded to the winner increases in the contests’ randomness. We also provide empirical evidence for this relationship using data from professional road running. In addition, we show that prize structures might be used to screen between players of differing ability.
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