The Welfare Costs of Misaligned Incentives: Energy Inefficiency and the Principal-Agent Problem

Joshua Blonz
Additional contact information
Joshua Blonz: Resources for the Future

No 18-28, RFF Working Paper Series from Resources for the Future

Abstract: In many settings, misaligned incentives and inadequate monitoring lead employees to take self-interested actions contrary to their employer's wishes, giving rise to the classic principal-agent problem. In this paper, I identify and quantify the costs of misaligned incentives in the context of an energy efficiency appliance replacement program. I show that contractors (agents) hired by the electric utility (the principal) increase their compensation by intentionally misreporting program data to deliberately authorize replacement of non-qualifi ed refrigerators. I provide empirical estimates of the impacts of misaligned incentives on (1) the effectiveness of energy efficiency retro fits and (2) social welfare. I estimate that unqualifi ed replacements reduce welfare by an average of $106 and save only half as much electricity as replacements that follow program guidelines. The same program without a principal-agent distortion would increase welfare by $60 per replacement. The results provide novel evidence of how principal-agent distortions in the implementation of a potentially bene ficial program can undermine its value.

Date: 2018-11-29
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://www.rff.org/documents/1828/RFF_WP_18-28.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:rff:dpaper:dp-18-28

Access Statistics for this paper

More papers in RFF Working Paper Series from Resources for the Future Contact information at EDIRC.
Bibliographic data for series maintained by Resources for the Future ().