Contests and collaborations are a great engagement tool!
I've seen many great contests, bounties and collaboration-offers at steemit.
Those contests are an essential community-building tool
Competition is good, because it let's people come out of their corner and share their personalities with the communtiy.
Also steem-prices create value (and demand) for steem
If you win steem in a contest, you will likely not spend it elsewhere, but power-up or maybe even use it to create your own contest.
Netiquette
But - engagement requires both ways
Unfortunately I recently saw some competitions, where the creator of the contest does not upvote the (serious) entries and did not even reply with a short: "Thank you!"
If someone puts in serious efforts in your contest, he deserves your appreciation
Wether you like someones entry or not, it's an essentially good habit (netiquette) to react on his entry. This way you show, that you've noticed his entry to say the least. You should seriously consider reblogging posts of contestants, that create an extra contest-entry-post. That way both of you are spreading the word to a broader audience.
Don't be a (sell-) fish
It's extremely demotivating, if you do not react to your participants. They won't likely come back and maybe never will enter another contest.
A game of give and take
It's also very demotivating for the contest-creator when the winner(s) do(es) not say: "Thank you!", after you've sent them the price.
TL;DR
Contests are an important engagement tool for the growth and grade of this community. But please communicate with eachother to make it a good experience for both sides.