Optimal Prize Design in Team Contests

Abstract

This paper studies effort-maximizing prize designs in team contests with an arbitrary number of pairwise battles. The organizer rewards the teams contingent on battle outcomes subject to budget balance constraints. Our analysis fully accommodates heterogeneities across players and battles. We discover an innovative measure of the teams' strengths. The optimal design is a majority-score rule with a headstart score for the weaker team: all battles are assigned team-invariant scores; the team collecting higher total scores from its winning battles wins the entire prize. The optimal design is robust to homogeneity-of-degree-zero contest technologies and contest temporal structure.