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Split Incentives in Residential Energy Consumption

We explore two split incentive issues between owners and occupants of residential dwellings: heating or cooling incentives are suboptimal when the occupant does not pay for energy use, and insulation incentives are suboptimal when the occupant cannot perfectly observe the owner's insulation choice. We empirically quantify the effect of these two market failures and how they affect behavior in California. We find that those who pay are 16 percent more likely to change the heating setting at night and owner-occupied dwellings are 20 percent more likely to be insulated in the attic or ceiling. However, in contrast to common conception, we find that only small overall energy savings may be possible from policy interventions aimed at correcting the split incentive issues. Keywords: Principal-agent, Asymmetric information, CO2 emissions

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Energy Specializations: Energy Modeling – Sectoral Energy Demand & Technology; Electricity – Markets and Prices ; Electricity – Policy and Regulation

JEL Codes:
Q55 - Environmental Economics: Technological Innovation
D42 - Market Structure, Pricing, and Design: Monopoly
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: Principal-agent, Asymmetric information, CO2 emissions

DOI: 10.5547/01956574.33.2.3

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Published in Volume 33, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.