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

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  • Blonz, Joshua

    (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.

Suggested Citation

  • Blonz, Joshua, 2018. "The Welfare Costs of Misaligned Incentives: Energy Inefficiency and the Principal-Agent Problem," RFF Working Paper Series 18-28, Resources for the Future.
    • Handle: RePEc:rff:dpaper:dp-18-28
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    File URL: https://www.rff.org/documents/1828/RFF_WP_18-28.pdf
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