Editing Principal–agent problem (section)

==Energy consumption==
The "principal–agent problem" has also been discussed in the context of energy consumption by Jaffe and Stavins in 1994. They were attempting to catalog market and non-market barriers to [[Efficient energy use|energy efficiency]] adoption.  In efficiency terms, a [[market failure]] arises when a technology which is both cost-effective and saves energy is not implemented. Jaffe and Stavins describe the common case of the landlord-tenant problem with energy issues as a principal–agent problem. "[I]f the potential adopter is not the party that pays the energy bill, then good information in the hands of the potential adopter may not be sufficient for optimal diffusion; adoption will only occur if the adopter can recover the investment from the party that enjoys the energy savings. Thus, if it is difficult for the possessor of information to convey it credibly to the party that benefits from reduced energy use, a principal/agent problem arises."<ref>{{cite journal|last1 = Jaffe|first1 = Adam B|last2 = Stavins|first2 = Robert N|title = The energy efficiency gap: What does it mean?|journal = Energy Policy|date = 1994|volume = 22|issue = 10|page = 805|url = https://scholar.harvard.edu/files/stavins/files/the_energy_efficiency_gap.pdf|doi = 10.1016/0301-4215(94)90138-4|access-date = May 1, 2019|archive-date = May 1, 2019|archive-url = https://web.archive.org/web/20190501215449/https://scholar.harvard.edu/files/stavins/files/the_energy_efficiency_gap.pdf|url-status = live}}</ref>

The energy efficiency use of the principal agent terminology is in fact distinct from the usual one in several ways. In landlord/tenant or more generally equipment-purchaser/energy-bill-payer situations, it is often difficult to describe who would be the principal and who the agent. Is the agent the landlord and the principal the tenant, because the landlord is "hired" by the tenant through the payment of rent? As Murtishaw and Sathaye, 2006 point out, "In the residential sector, the conceptual definition of principal and agent must be stretched beyond a strictly literal definition."

Another distinction is that the principal agent problem in energy efficiency does not require any information asymmetry: both the landlord and the tenant may be aware of the overall costs and benefits of energy-efficient investments, but as long as the landlord pays for the equipment and the tenant pays the energy bills, the investment in new, energy-efficient appliances will not be made. In this case, there is also little incentive for the tenant to make a capital efficiency investment with a usual payback time of several years, and which in the end will revert to the landlord as property. Since energy consumption is determined both by technology and by behavior, an opposite principal agent problem arises when the energy bills are paid by the landlord, leaving the tenant with no incentive to moderate her energy use. This is often the case for leased office space, for example.

The energy efficiency principal agent problem applies in many cases to rented buildings and apartments, but arises in other circumstances, most often involving relatively high up-front costs for energy-efficient technology. Though it is challenging to assess exactly, the principal agent problem is considered to be a major barrier to the diffusion of efficient technologies. This can be addressed in part by promoting shared-savings performance-based contracts, where both parties benefit from the efficiency savings. The issues of market barriers to energy efficiency, and the principal agent problem in particular, are receiving renewed attention because of the importance of global [[climate change]] and rising prices of the finite supply of [[fossil fuels]].<ref>{{cite web |title=Mind the Gap |url=https://webstore.iea.org/mind-the-gap |url-access=registration |publisher=IEA |access-date=May 1, 2019 |archive-date=May 1, 2019 |archive-url=https://web.archive.org/web/20190501220102/https://webstore.iea.org/mind-the-gap |url-status=live }}</ref>