There's a great article about this in a recent RC Car Action (September) titled "Piston Power". I can't find it on their site, so I'll type out some of it. This should answer all of your head clearance questions!
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"How does head clearance affect performance?
Too Little head Clearance:
In a worst case scenario, a tight clearance may cause the piston to hit the cylinder head when the engine reaches it's full running temp and max rpm. And in some cases can cause excessive compression, which can lead to detonation, a blown plug, or an oveall lack of power with high temps.
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Too much clearance:
-Can reduce power. It will cause an otherwise powerfull engine to perform poorly because it can't develop as much cylinder pressure as is possible. When the gap is too large the cylinder pressure is reduced, so less fordce pushes down on the piston. With extreme clearance, the engine may not be able to develop enough compression to ignite the fuel. Symptoms of too much clearance include an unstable low-speed mixture setting and a lower than avg. engine running temp.
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Which engines benefit the most?:
head clearance adjustments tend to benefit sport engines more than expensive comp. engines. Sport engines usually have much more clearance, and the reason is that it makes them easier to tune. The clearance on more expensive comp. engines are set a little more precisely to produce max power. To some degree all engines could possibly benefit from a clearance adjustment becaue the manufacturers don't typically have time to precisely set each engine.
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When should I increase clearance?
If you engine regularly blows or damages plugs even though it has been tuned to run at a reasonable temp. or if you often use a higher nito % than what's reccomended, add a 0.1mm head shim to increase clearance.
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When should I decrease clearance?
Removing shims is a tricky subject. Engines' ideal clearance measurements differ, and each is based on internal components' tolerances. Only highly experienced engine tauners should reduce an engine's clearance signifigantly. In general, if your engine is easy to tune, runs well at low temps and rarely, if ever, blows a plug, you can probably safely remove a this (0.1mm) shim to boost performance.
Many engines have severl head shims installed on the head button, but some 9most notably OS) have a single shim that should not be removed. In those engines the shim acts as a gasket between the cylinder and the piston sleeve: you'll risk poor performance if you run an engine without any head shims. You may be able to replace the standard one with a thinner one, but you should always have at least one shim. You shouldn't reduce the head clearance less than .020 inch (0.5mm). If you reduce it too much, stretching and heat expansion could bring the piston dangersously close to the head once the engine is warmed.
The most important thing to remember when experimenting with the removal of head shims is to note which shims were in place from the factory and make only small adjustments at a time. Exercising caution means avoiding going too far in one direction or another."
By: Stephen Bess
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BTW, the article is on page 224 of the September RC Car Action.