Deterring online advertising fraud through optimal payment in arrears
By: Benjamin G. Edelman
Contributors: Harvard Business School
Edition: 2nd rev.
Series: Working paper / Harvard Business School -- 08-072; Working paper (Harvard Business School) -- 08-072
Publisher: Harvard Business School
Published: 2008
Place of publication: Boston]
Number of pages: 15
Description: 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.
Notes: Originally published as: Optimal deterrence when judgment-proof agents are paid in arrears - with an application to online advertising fraud. c2008.

"Revised October 2008"--Publisher's web site.

Includes bibliographical references.