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Fan, Cuihong; Wolfstetter, Elmar G. (September 2006): Procurement with Costly Bidding, Optimal Shortlisting, and Rebates. SFB/TR 15 Discussion Paper No. 166


We consider the procurement of a complex, indivisible good when bid preparation is costly, assuming a population of heterogeneous contractors. Shortlisting is introduced to implement the optimal number of bidders, and we explore whether the procurer should reimburse the nonrecoverable cost of preparing a bid in whole or in part. We find that a reimbursement policy is profitable for the procurer only if performance and bidding costs are negatively correlated. Moreover, negative rebates (entry fees) always dominate positive rebates.