The Effect of Third Party Investigation on Pay-Per-Click Advertising

Click fraud is a critical problem in pay-per-click advertising. While both service providers (SPs) and advertisers employ technologies to identify fraudulent clicks, prior work shows that they cannot be induced to make further improvements to their respective technologies. We consider the use of third-party investigation to address this problem and examine whether the responsibility of investigation payments helps induce both parties to work towards improving their technologies unilaterally. Using a principal-agent setting, we show that the advertiser always has incentives to improve his verification technology and the SP will improve his detection technology only when the detection cost is not too large. Given that the cost of detection technology is likely to be small due to the use of inexpensive online filters, our result suggests that third-party investigation helps induce further enhancements to the technologies and is a good mechanism to address the incentive problems in the click fraud setting.