IEEE 802.16 has gained significant research attention because of its broadband wireless services over a large coverage area. Bandwidth allocation plays very important role at the link layer of IEEE 802.16. In this paper, by considering the Automatic Repeat reQuest (ARQ) scheme for an erroneous wireless channel, a dynamic bandwidth allocation algorithm for downlink traffic in a multiuser environment is proposed and a detailed analysis is performed. Simulation results show that the proposed algorithm significantly improves the delay performance of the Service Data Unit (SDU) which consists of multiple Protocol Data Units (PDUs), and ensures the fairness among different users.