American Economic Journal:
Economic Policy
ISSN 1945-7731 (Print) | ISSN 1945-774X (Online)
The Costs of Misaligned Incentives: Energy Inefficiency and the Principal-Agent Problem
American Economic Journal: Economic Policy
vol. 15,
no. 3, August 2023
(pp. 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.Citation
Blonz, Joshua A. 2023. "The Costs of Misaligned Incentives: Energy Inefficiency and the Principal-Agent Problem." American Economic Journal: Economic Policy, 15 (3): 286–321. DOI: 10.1257/pol.20210208Additional Materials
JEL Classification
- D82 Asymmetric and Private Information; Mechanism Design
- L68 Appliances; Furniture; Other Consumer Durables
- L94 Electric Utilities
- L98 Industry Studies: Utilities and Transportation: Government Policy
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