Energy efficiency and the principal-agent problem

Concern about climate change and greenhouse gas (GHG) emissions has brought about renewed attention to energy conservation, with a particular focus on energy efficiency of buildings. Economic literature of the past 30 years has identified both market and non-market barriers concerning energy efficiency, with one in particular affecting the residential sector: the principal-agent (PA) problem. Involving transaction costs, asymmetrical information, and split incentives, PA problems are thought to keep economically sound investments in energy efficiency from being realized. This problem is prevalent within the landlord-tenant relationship in the private rental housing segment. And since it is generally acknowledged that energy use in buildings can be significantly reduced through cost effective investments in efficient technology, it is important to understand the magnitude of PA problems that keep economically sound investments from being realized. The aim of this study, therefore, is to quantify the effect of the PA problem on the residential sector in Austria. A conditional demand model is regressed whereby annual energy expenditure per square meter is estimated as a function of occupancy type, housing characteristics, location and socio-economic variables using household-level micro-data from the European Union Statistics on Income and Living Conditions. The analysis indicates that PA problems are unimportant or irrelevant to energy efficiency in the Austrian residential sector and concludes with some explanations as to why that may be the case.