Deterring online advertising fraud through optimal payment in arrears

I develop a screening model with delayed payments and probabilistic delayed observation of agents' types. I derive conditions in which a 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 agents. I apply the model to online advertising markets widely perceived to be a hotbed for fraud. I estimate that a leading affiliate network could have invoked an optimal payment delay to eliminate 71% of fraud without decreasing profit.