Risk, Information, and Incentives in Online Affiliate Marketing

The authors examine online affiliate marketing programs in which merchants oversee thousands of affiliates they have never met. Some merchants hire outside specialists to set and enforce policies for affiliates, whereas other merchants ask their marketing staff to perform these functions. For clear violations of applicable rules, the authors find that outside specialists are the most effective at excluding the responsible affiliates, which can be interpreted as a benefit of specialization. However, in-house staff are more successful at identifying and excluding affiliates whose practices are viewed as “borderline” (albeit still contrary to merchants’ interests), forgoing the efficiencies of specialization in favor of the better incentives of a company's staff. The authors consider the implications for marketing of online affiliate programs and for online marketing more generally.