The energy efficiency gap in the rental housing market: It takes both sides to build a bridge

Abstract

We revisit the issue of the energy efficiency (EE) gap by explicitly acknowledging the two-sided nature of the rental housing market and two-sided asymmetries of information between tenants and landlords. We show that Energy Performance Certificates (EPCs) that signal a dwelling’s energy performance induce optimal EE investments by landlords only if tenants pay their energy expenditures in full. When landlords pay part of the energy expenditures, they seek tenants who will conserve energy. Employing a matching model, we show that asymmetry of information over tenant characteristics results in imperfect matching and welfare losses. This may even render EPCs counterproductive. As a remedy, we show that tenant-side signaling needs to be rolled out jointly with EPCs and may even be sufficient in the case of contracts including energy expenditures. Data from an original survey provides support for these insights and suggests that information on the tenants’ side triggers more EE investment.