Hunting for the discouragement effect in contests

The "discouragement effect" (DE) is mentioned routinely as a reason for why heterogeneity is detrimental for incentives in contests. It serves as a theoretical argument for various policies aimed at homogenizing contestants. We show that, at least in static contests, the DE has no robust theoretical foundation. We divide widely used contest models into two classes. In the first class, heterogeneity either decreases or increases aggregate effort. In the second class, the effect of heterogeneity depends crucially on how it is defined. Hence, the DE cannot serve as a go-to argument for why heterogeneity in contests is undesirable.