141103 GOT Guidebook (with cover & back)_final - page 52

HKGBC Green Tenancy Driver for Office Buildings
CH 6
o economists, the Split Incentive problem is also
known as the Principal–Agent (PA) problem. The PA
problem consists of two parties - the Principal and the
Agent. Their roles are hirers and operators respectively.
The problem mainly lies in the misalignment of interests or
the existence of asymmetrical information that creates a
conflict between two parties. For instance, the standards set
by the Principal may not exactly align with the interests of
the Agent due to the Agent’s operational nature.
The question is, how does this relate to the Split Incentive
problem, in particular in the context of a Green Tenancy?
The PA problem is an example of market failure - a
scenario where the quantity or qualities demanded is not
equated by the supply. In the context of the PA problem, the
objectives demanded by the Principal are not fulfilled by
the operating Agent, and there are certain factors that lead
to this problem including
incomplete information, first costs vs
energy costs and uncertainty
(Wilkerson, 2012). These factors
all contribute to a common problem which is asymmetric
information between both parties. Take fluorescent lamp
as an example, rarely do a buyer get a label depicting
annual savings in kWh when compared to other products.
This example is a display of the asymmetry of information
as it lacks complete information such as energy consumption
data which then creates a sense of uncertainty and gives
potential buyers a biased understanding between first costs
and operational costs. In this case, the seller is the principal
while the agent is the buyer. As the seller’s incentive is to sell
as many fluorescent lamps as possible, it has disregarded
the incentive of the buyer – which is to have efficient lamps
to reduce electricity costs. Hence it can be concluded that
the PA problem is a representation of the asymmetry of
incentives, or in other words the fundamental fault of a Split
The Fundamentals of
Split Incentive
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