I think the real problem with "participation trophies" is that it has very low competence signal. Not negative. But very low for everybody, regardless of performance. The winner's prize, at the same time, gives an extremely positive competence signal to the winner (at the expense of the negative signal to everybody else).

Again, if you put yourself into the shoes of a designer of an incentive structure, then you are facing a trade-off here. Do you want more people to keep doing this activity, or do you want to single out top performers? In sports, I believe it's more of a cultural element. Scandinavian countries, for example, are notorious for their culture of not expressing their personal success (Janteloven). That fits well with the Nordic sports model. More individualistic countries or post-soviet countries with "win at all costs" sports ideology tend to favor incentive structures optimized for early top performers.