Awarding prizes for work that meets a high standard can give students added drive to reach that standard. Students who do not think of themselves as capable of good work, or who simply do not care about succeeding academically, might begin to take a greater interest if they stand to gain a reward. Students who are already self-motivated might find the drive to push themselves to new levels of effort and achievement if they know it will lead to greater recognition or an attractive reward.
People live largely by habit, and our habits are formed by repeated choices and actions. Giving students external motivation through a reward system can cause them to build strong study habits even if their motivations for doing so are not rooted in academic success. For example, a student who reads for half an hour every night to get a prize might grow accustomed to reading in the evenings, even when the reward system is no longer in place. Prize systems can motivate students to practice good choices that will shape their lives for years to come.
A prize is an extrinsic motivation, meaning that it teaches students to perform their work for a reason other than the value of the work itself. Even if it motivates good study habits on the surface, an extrinsic reward system can cripple students in the long term by teaching them to value surface benefits over hard work and real learning. This can reinforce a tendency to take shortcuts or even cheat, since the student's actual goal becomes getting a prize rather than satisfying the spirit of an assignment.
Even if you set a very high standard that students have to meet before they receive a prize, the fundamental nature of a prize-based incentive system reinforces an emphasis on the minimum performance requirement. Defining success in terms of earning a prize means students will have no reason to go beyond the minimum effort needed to get the prize. You can counter this effect by working to reward effort or fulfilled potential, though this can quickly devolve into a subjective judgment call.