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.