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

Joshua A. Blonz

American Economic Journal: Economic Policy, 2023, vol. 15, issue 3, 286-321

Abstract: In many settings, misaligned incentives and inadequate monitoring lead employees to take self-interested actions. This paper identifies and quantifies the costs of this principal-agent problem 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 authorize the replacement of nonqualified refrigerators. I estimate that each unqualified replacement reduces program benefits by $106 and saves 30 percent less electricity than replacements that follow program guidelines. The same program without a principal-agent distortion would increase program benefits by $60 per replacement.

JEL-codes: D82 L68 L94 L98 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (2)

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DOI: 10.1257/pol.20210208

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