Optimal Prize Design in Parallel Rank-order Contests

Abstract: This paper investigates a two-stage game-theoretical model with multiple parallel rank-order contests. In this model, each contest designer sets up a contest and determines the prize structure within a fixed budget in the first stage. Contestants choose which contest to participate in and exert costly effort to compete against other participants in the second stage. First, we fully characterize the symmetric Bayesian Nash equilibrium in the subgame of contestants, accounting for both contest selection and effort exertion, under any given prize structures. Notably, we find that, regardless of whether contestants know the number of participants in their chosen contest, the equilibrium remains unchanged in expectation. Next, we analyze the designers' strategies under two types of objective functions based on effort and participation, respectively. For a broad range of effort-based objectives, we demonstrate that the winner-takes-all prize structure-optimal in the single-contest setting-remains a dominant strategy for all designers. For the participation objective, which maximizes the number of participants surpassing a skill threshold, we show that the optimal prize structure is always a simple contest. Furthermore, the equilibrium among designers is computationally tractable when they share a common threshold.