Split Incentives and Energy Efficiency Investment: Evidence from the Housing Market

Abstract

Investments in energy efficiency within the built environment play a crucial role in global efforts to combat climate change. However, a significant obstacle to these investments arises from the differing incentives between landlords and tenants in the housing market. Landlords, who typically do not bear utility costs, may choose to invest less in energy efficiency improvements if these investments are not adequately reflected in rental rates. Our study provides empirical evidence of this market distortion, drawing on a comprehensive panel dataset from the Dutch housing market covering 3.8 million homes over an eleven-year period. We document that, on average, rental properties exhibit approximately 7.7 percent lower energy efficiency and consume 7.1 percent more natural gas compared to similar owner-occupied homes, highlighting the impact of split incentives between landlords and tenants. This disparity is particularly pronounced for rental properties constructed before the implementation of energy-saving building regulations. To mitigate potential endogeneity concerns, we also utilize a quasi-experimental approach, leveraging the panel structure of the data. Our findings suggest that the transition from rental to owner status leads to a reduction in subsequent energy consumption of up to approximately 6 percent, observed up to eight years after the transition, compared to homes that remained rental. These results underscore the necessity of targeted government intervention in rental-property markets to effectively address this issue.

Keywords: Energy efficiency, split incentives, energy consumption, housing market