I was recently pointed in the direction of an area of Economics called "Tournament Theory" (thx Leron Kwong). It is a theory in personnel economics (human resource management) that tries to explain that rewards (pay and compensation) is not based on additional productivity, but on the relative difference between individuals.
The situations it tries to explain do appear in chess, but I wonder if this is coincidental. For example, normally tournaments are structured so that 1st prize is significantly larger than 2nd prize (normally twice as much). But the winner of a tournament is not normally twice as good as the player that came second. So the reason for the difference is not based on performance, but on tournament ranking. This also occurs on the field of business, where the President of a company earns a great deal more than Vice-Presidents.
As this theory was only first proposed in the early 1980's, chess practice clearly pre-dates it. I assume that the method of dividing up prizes in a chess tournaments probably arose through trial and error, before a model that the majority of players seemed happy with was developed.
Nonetheless, there may be some ideas that chess could use. I have seen events where 1st prize greatly exceeds the other prizes (1st $1000, 2nd $100), and this seems to have skewed the performance of the top players. Given that one of the goals of tournament theory is to maximise the effort of the tournament participants, it may turn out that there is a theoretical "better way" to divide up prize money in events.
(NB I know a number of economists read this blog, so if I have got anything wrong on this topic, feel free to correct or expand)
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Do not questions around the distribution of prize money also apply in other sports or activities where participants compete at an individual level? Golf, Tennis and Athletics come to mind.
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