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The B.E. Journal of Theoretical Economics

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Optimal Use of Rewards as Commitment Device When Bidding Is Costly

Luke Hu
Published Online: 2013-05-29 | DOI: https://doi.org/10.1515/bejte-2012-0015


This paper considers procurement auctions with costly bidding when the auctioneer is unable to commit himself to restrict the number of bidders. The auctioneer can, however, publicly pledge to pay a financial reward to every contractor he has invited to bid, as an indirect commitment device. Rewards for short-listed bidders are costly. Nevertheless, it is generally optimal for the procurer to credibly implement the same restriction of the number of bidders that is optimal under full commitment.

Keywords: procurement; auctions; industrial organization; mechanism design


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About the article

Published Online: 2013-05-29

Published in Print: 2013-01-01

For example, the World Bank is bound by its procurement rules to short-list six bidders, if feasible, and to publish the short-list of bidders when they are invited to make a bid.

Kaplan and Sela (2006) consider entry costs without reimbursements, assuming that entry costs are private information and find that paradoxically bidders’ equilibrium payoffs may be decreasing in their valuations. Celik and Yilankaya (2009) analyze the optimal auction when bidding is costly, assuming a private values model.

For simplicity, one may invoke that bidders do not participate in the auction if they predict that the procurer invites more than the announced number of bidders. This avoids glutted notation that would be necessary if one allowed for discrepancies between the announced size of the short-list and bidders’ prediction of it.

Of course, if m=n, upward deviations are impossible; therefore, r*(n) = 0 is trivially true.

Citation Information: The B.E. Journal of Theoretical Economics, Volume 13, Issue 1, Pages 179–189, ISSN (Online) 1935-1704, ISSN (Print) 2194-6124, DOI: https://doi.org/10.1515/bejte-2012-0015.

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