Behavioral responses of green builders to discontinuous certification schemes

Abstract

I study behavioral responses to the green building certification system developed by the Leadership in Energy and Environmental Design program (LEED). LEED provides four different certification levels (Certified, Silver, Gold, and Platinum) that are all defined by a specific threshold. Using micro data on LEED-certified buildings, I document bunching of buildings at or slightly above the different cutoffs. The findings are robust to different specifications, observed for different versions of LEED. Using the methods from the public finance literature, which studies bunching responses to ‘kinks’ and ‘notches’ in tax systems (e.g., Kleven and Waseem, 2013; Chetty et al., 2011), I quantify the bunching mass at each threshold and for different US states to explain variance in observed bunching. Using cross-sectional variation in bunching across different states of the US, I find a significant negative relationship between the bunching estimators and energy prices. This finding suggests that higher energy prices provide investors with incentives to compare the detailed product features and in turn reduces the building developers’ incentive to situate right at the certification cutoff.