I've seen a mixture of the two and wonder which one would have the best conversion when it comes to Adwords. Are you setting up a secondary domain that will automatically redirect to the merchants landing page / your affiliate link? Or... Do you have your own landing page and you're linking to it, then allowing the extra step for the user to click on an affiliate link? I've seen both, what's more profitable?
Like Nerv says, the 2nd option. You'll also be able to sometimes get the visitors to add your site to their favourites/bookmarks and if you have an opt-in list, they may leave their email address if you give them a valid reason to do so. Basically, the 2nd option requires more work, but I would expect your Adwords Quality score to be better and you'll have a better chance to market to them again and again.
In my testing I setup a landing page and use Google website optimizer to test and see what will work the best. I make my landing pages using wordpress and a website optomizer plugin which makes it work easier. One tip I recommend is to target your ads to the areas that paypal has localized sites, which are : * Australia * Austria * Belgium * Canada * China * France * Germany * Hong Kong * Italy * Mexico * Netherlands * Poland * Singapore * Spain * Switzerland * United Kingdom * United States By doing this I have found that you get more successful order form submits, and this is because I think that paypal will error out or not count the transaction if it is not a area they do not like. So go make some landing pages and test test test. Good luck! Mr.L