Split Incentives

Start your research with this article

• Clearly state the nature of the split incentive problem.

• Brainstorm and research outline a couple of possible solutions.

• Choose a possible solution and provide arguments and evidence for its efficiency.

The split incentive problem is the issue of the lack of energy efficiency in rental homes. Landlords are typically not in charge of paying energy bills for houses that are being rented so they are more likey to choose cheaper appliances to fill their rentals instead of choosing the materials that will save more energy. Although renters would very much benefit from living in more energy efficients homes they are also not likely to make any changes themselves because they do not want to put the investment into upgrades for a building they don't necessarily plan on living in for long. This crreates a problem because neither party has the incentive to want to better their home which leads to poor energy effieciency and higher bills.

There have been many different approaches used by cities and states to try and address this problem, however, one of the better solutions I thought are green leases. Green leases are contracts built on an agreement between both the landlord and the renter to be energy efficient. In a green lease the landlord agrees to make upgrades to the building in exhange for raising the rent by a certain amount. The amount that the landlord raises the rent to is based on how much the renter will potentially be saving in energy costs due to the new upgrades. In this article, "Split Incentive Stalls Energy Efficiency in Rental Housing," they use the example of a renter who pays 100 dollars for their energy bills which means the landlord could then raise their rent by 80 dollars. In this case even though the rent would be higher the tenant would still be ultimately paying less than they were and the landlord would also be making back the money they originally invested into the place. However, the issues with just soley using this solution would be that it could become very complicated depending on how many different things need to be upgraded and it is possible for the landlord themselves to have a difficult time with finding the money to make these changes.

The other solution that I think would help green leases become more of an option for people is the PACE Financning option that some places have implemented including Sonoma County. PACE Financing helps property owners finance for energy efficient projects making those types of upgrades more accessible. This allows for the property owner to make the necessary changes now and pay for them in installments that are added on to their property taxes. I believe green leases alone would not be enough incentive for landlords to want to pay for improvements because green leases are still not widely used which can cause people to be skeptical and unwilling to try something different. However, I think the combination of these two would be more ideal because landlords woud have access to funds to help them make the improvments they want without having to use their own money to do so. Also, with the cooperation of the tenant the landlord would be able to still raise the rent based on how much the renter would be saving in energy costs. There are many different ways people are trying to solve this incentive problem and I think the combination of these different ideas will help toawrds fixing that issue.

http://www.academia.edu/2900824/Policy_Options_for_the_Split_Incentive_Increasing_Energy_Efficiency_for_Low-Income_Renters

Lindsey Bales - Feedback

I agree with your approaches to solving the split incentive problem. "Green leases" are a great approach to the problem that benefits both the landlord and renter. I also really like the PACE financing approach as well. Overall, great job explaining the approaches and how they can help.

Daniel Soto Feedback

Full credit. Great job in explanation and detail.