Handicaps in incomplete information all-pay auctions with a diverse set of bidders

•I examine an incomplete information all-pay auction with three asymmetric bidders.•A set of diverse bidders receive preferential treatment.•A subset of the favoured bidders may become worse off with preferential treatment.

In many contests, a subset of contestants is granted preferential treatment which is presumably intended to be advantageous. Examples include affirmative action and biased procurement policies. In this paper, however, I show that some of the supposed beneficiaries may in fact become worse off when the favored group is diverse. The reason is that the other favored contestants become more aggressive, which may outweigh the advantage that is gained over contestants who are handicapped. The contest is modeled as an incomplete-information all-pay auction in which contestants have heterogenous and possibly non-linear cost functions.