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The B.E. Journal of Theoretical Economics

Editor-in-Chief: Schipper, Burkhard

Ed. by Fong, Yuk-fai / Peeters, Ronald / Puzzello , Daniela / Rivas, Javier / Wenzelburger, Jan

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1935-1704
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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

Abstract

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

References

  • Celik, G., and Yilankaya, O. 2009. “Optimal Auctions with Simultaneous and Costly Participation.” The BE Journal of Theoretical Economics 9(1):1–31.Google Scholar

  • Fan, C., and Wolfstetter, E. 2008. “Procurement with Costly Bidding, Optimal Shortlisting, and Rebates.” Economics Letters 98:327–34.Web of ScienceGoogle Scholar

  • Gal, S., Landsberger, M., and Nemirovski, A. 2007. “Participation in Auctions.” Games and Economic Behavior 60:75–103.Web of ScienceGoogle Scholar

  • Kaplan, T., and Sela, A. 2006. “Second Price Auctions with Private Entry Costs.” Technical Report, Ben-Gurion University.Google Scholar

  • Lang, K., and Rosenthal, R. W. 1991. “The Contractors’ Game.” RAND Journal of Economics 22:329–38.Google Scholar

  • Tan, G. 1992. “Entry and R & D in Procurement Contracting.” Journal of Economic Theory 22:41–60.Google Scholar

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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©2013 by Walter de Gruyter Berlin / Boston. Copyright Clearance Center

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