Online sponsored search advertising has emerged as the dominant online advertising format largely because of their pay-for-performance nature, wherein advertising expenditures are closely tied to outcomes. While the pay-for-performance format substantially reduces the wastage incurred by advertisers compared to traditional pay-per-exposure advertising formats, the reduction of such wastage also carries the risk of reducing the signaling properties of advertising. Lacking a separating equilibrium, low-quality firms in these markets may be able to mimic the advertising strategies of high-quality firms. This study examines this issue in the context of online sponsored search markets. Using data gathered from sponsored search auctions for keywords in a market without intervention by the intermediary, we find evidence of adverse selection for products/services characterized by high uncertainty. On the other hand, there is no evidence of adverse selection for similar products in a regulated sponsored search market, suggesting that intervention by the search intermediary can have a significant impact on market outcomes and consumer welfare.
An important task for managers in information technology (IT) service settings is the judgment of service performance. The complex and intangible nature of IT services, however, renders this task especially difficult. We use a sample of 85 outsourced software development projects to test for the presence of the "input bias," which is defined as the systematic misuse of nondiagnostic input information in forming managerial judgments of outcomes. The service outcome we examine is process performance. The diagnostic inputs are given by objective performance metrics based on the final cost and duration of completed projects, whereas the nondiagnostic inputs are risk anticipations formed by managers prior to the start of the project. We find strong evidence of the input bias, which leads managers' subjective assessments to diverge considerably from objective outcomes, and that it is moderated by contract type. Our study contributes to better service management by improving our understanding of managers' judgments of service performance and how these judgments are formed.