Equilibrium sorting and moral hazard in residential energy contracts

This paper studies tenant behavior in rental housing when the landlord pays for heating. I develop a model in which renters have heterogeneous preferences for home size and indoor temperature. When energy is costly, renters choose smaller apartments and turn down the heat—or sort into apartments with landlord-pay energy bills. I estimate the model using exogenous variation in energy prices and use a machine-learning algorithm to explore preference heterogeneity. Surprisingly, I find that renters who prefer hotter temperatures do not systematically choose landlord-pay units, though I am unable to rule out sorting on preferences for unobserved home attributes. Eliminating moral hazard by forcing all renters to pay their own bill reduces energy consumption by 25% due to renters turning down the heat (21%) and choosing smaller units (4%). Moral hazard in residential energy contracts costs the United States $836 million per year in welfare losses including $246 million from carbon emissions.