16 Pages Posted: 20 Feb 2008 Last revised: 29 Jul 2014
Date Written: February 3, 2009
Online advertisers face substantial difficulty in selecting and supervising small advertising partners: Fraud can be well-hidden, and limited reputation systems reduce accountability. But partners are not paid until after their work is complete, and advertisers can extend this delay both to improve detection of improper partner practices and to punish partners who turn out to be rule-breakers. I capture these relationships in a screening model with delayed payments and probabilistic delayed observation of agents' types. I derive conditions in which an advertising principal can set its payment delay to deter rogue agents and to attract solely or primarily good-type agents. Through the savings from excluding rogue agents, the principal can increase its profits while offering increased payments to good-type agents. I estimate that a leading affiliate network could have invoked an optimal payment delay to eliminate 71% of fraud without decreasing profit.
Keywords: online advertising, screening, signaling, contracts, fraud
Suggested Citation: Suggested Citation
Edelman, Benjamin G., Deterring Online Advertising Fraud Through Optimal Payment in Arrears (February 3, 2009). Financial Cryptography and Data Security: Proceedings of the International Conference (September 2009).. Available at SSRN: https://ssrn.com/abstract=1095262 or http://dx.doi.org/10.2139/ssrn.1095262