The split incentives energy efficiency problem: Evidence of underinvestment by landlords

Highlights: • Split incentives and asymmetric information cause landlords underinvest in energy efficiency measures. • Empirical evidence reveals significant underinvestment in all categories of residential energy usage. • The market distortion causes space-heating costs to rise by 4%, cooling by 2.8%, and water-heating by 0.6%. - Abstract: Due to asymmetric information between landlords and renters, landlords with tenants who pay the utility bill underinvest in energy efficiency measures. Using data from the 2009 Residential Energy Consumption Survey, I present empirical evidence that this underinvestment occurs in multiple categories of residential energy efficiency: space-heating, water-heating, window thickness, insulation, and weatherization. Because these landlords did not invest at the same rate as homeowners and landlords who pay the energy bill, their tenants' energy bill was higher by nearly 2%. When combined with other researchers' estimations for appliances (Davis, 2010), insulation, and thermostat responsiveness for tenants (Gillingham et al., 2012), our results imply that renters use approximately 2.7% more energy overall due to the landlord-tenant split incentive issue.