A well-known theoretical result in the contest literature is that greater heterogeneity decreases performance of contestants because of the “discouragement effect.” Leveling the playing field by favoring weaker contestants through bid-caps and favorable tie-breaking rules can reduce the discouragement effect and increase the designer’s revenue. We test these predictions in an experiment. Our data show that indeed, strengthening weaker contestants through tie-breaks and bid-caps significantly diminishes the discouragement effect. Bid-caps can also improve revenue. Most deviations from Nash equilibrium can be explained by the level-k model of reasoning.
Llorente-Saguer, A., Sheremeta, R.M., & Szech, N. (2016). Designing contests between heterogeneous contestants: An experimental study of tie-breaks and bid-caps in all-pay auctions. ESI Working Paper 16-09. Retrieved from http://digitalcommons.chapman.edu/esi_working_papers/187/