The Split Incentive Problem

Split incentives arise when the “investor” and the “beneficiary” of the investment are split between different parties. Regarding rental housing and energy-efficient technologies, this situation can arise in a number of ways. If the building owner pays the utility expenses for the tenants, the tenant has little incentive to monitor or reduce his/her energy consumption. He/she is probably not even aware of magnitude of the energy bills for his/her apartment. The building owner has little incentive to invest in more efficient equipment, appliances, or efficiency upgrades because of the uncertainty regarding the savings he will actually realize. The tenant still controls the thermostat, lights, windows (open or closed), and so on.

When the tenant pays the utility bills, they have little incentive to make energy improvements because they do not own the building. It is likely that they will not live in the building long enough to see a return on any investment via monthly bill reductions. The building owner similarly has no incentive to upgrade aging equipment or make other energy improvements like better windows or air sealing because he/she will not recognize the direct benefit of lower monthly bills.

Types of available funding may also give rise to split incentives. Often an agency such as HUD will provide support to low and moderate-income tenants for a portion of their utility expenses. It may be a percentage or a flat amount per month. Public housing owners are also usually limited in the rents they can charge (for example, no more than X percent of monthly income). In each case, such a funding structure is likely to discourage energy conservation and energy-efficiency upgrades.