Optimal prizes in dynamic elimination contests: Theory and experimental evidence

• We investigate the effects of different prize structures on performance in dynamic contests.
• Under risk neutrality, multiple prizes elicit constant effort across all contest stages but deliver lower effort than a single prize.
• Under risk aversion, multiple prizes can elicit constant effort and higher effort than a single prize.
• The hypotheses are tested using data from controlled lab experiments.
• The behavior is consistent with the theoretical predictions; in particular with the expected heterogeneity in behavior depending on risk attitudes.

This paper investigates the implications of different prize structures on effort provision in dynamic (two-stage) elimination contests. Theoretical results show that, for risk-neutral participants, a structure with a single prize for the winner of the contest maximizes total effort, while a structure with two appropriately chosen prizes (a runner-up prize and a final prize) ensures incentive maintenance across stages. In contrast, a structure with two prizes may dominate a winner-takes-all contest in both dimensions if participants are risk-averse. Evidence from laboratory experiments is largely consistent with these predictions, suggesting that contest design should account for risk attitudes of participants.