Resources for the Future
“Measuring Inefficiencies When Agents Break their Principals’ Rules: The Case of Energy Efficiency Retrofits”
Abstract: In this paper, I quantify the negative welfare consequences resulting from the misalignment of incentives between principals and agents in the context of a home energy efficiency retrofit program. I show that contractors (agents) working on behalf of an electric utility (the principal) deliberately authorize ineligible upgrades to increase their own compensation. I exploit variation in contract structure to show that larger incentives lead to higher levels of agent misreporting. Using household-level monthly panel data, I find that each ineligible upgrades reduces welfare by $104 and saves half as much electricity as upgrades that follow program guidelines. I extend the principal-agent model to quantify the costs and benefits of the contract structure used in the appliance upgrade program, finding that the existing contract structure reduces program welfare benefits by one fifth. My results provide novel evidence of how agent incentives can reduce the efficacy of public policy, and they are the first to identify and measure how the principal-agent problem can reduce the savings of energy efficiency programs.