Skip to main content

Advertisement

SpringerLink
Log in

A New Rationale for Not Picking Low-Hanging Fruits: the Separation of Ownership and Control

  • Published:
Environmental Modeling & Assessment Aims and scope Submit manuscript

Abstract

Recent attempts at explaining the energy-efficiency gap rely on considerations related to organizational and behavioral/cognitive failures. In this paper, we build on the strategic delegation literature to advance a complementary explanation. We show that strategic market interaction may encourage business owners to instill a bias against energy efficiency in managerial compensation contracts. Since managers respond to financial incentives, their decisions will reflect this bias, resulting in a lack of investment.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2
Fig. 3
Fig. 4
Fig. 5

Similar content being viewed by others

Notes

  1. For literature surveys, see [14, 16, 29, 31].

  2. Or, to be more specific, liquidity constraints, risk, and losses of future options.

  3. For a recent survey of the strategic delegation literature, see Kopel and Pezzino [24].

  4. We assume decreasing returns to investment in energy efficiency. Indeed, energy efficiency solutions are neither perfectly substitutable nor perfectly complementary. Consequently, further investments lead to duplication of effort and cannibalization effects. In this simple model, if we assume increasing returns, owners’ and managers’ objectives become convex in investment so that the game has no interior equilibrium.

  5. This assumption is made for convenience only. The results would not change if firms were assumed to participate in an energy buy-back program whereby any surplus energy is purchased by the energy supplier. In order to cover this case, we need only replace the energy bill \(B(q_{i},\gamma _{i},r)=r\left (q_{i}-\gamma _{i}\right )\) in Eqs. 1 and 2 by the energy revenue \(R(q_{i},\gamma _{i},s)=s\left (\gamma _{i}-q_{i}\right )\) where s is the price at which the supplier buys back excess generated power. After making this substitution, we obtain exactly the same expressions for managerial compensation and business owners profits as in Eqs. 1 and 2, except that the energy rate r has been replaced by the feed-in tariff s. Therefore, this change to the model does not alter the trade-offs that managers and business owners face when defining their strategies.

  6. Since managerial compensation is intended to secure the participation of managers, it will be equal to their respective (exogenously defined) reservation incomes. Consequently, from an owner’s perspective, maximizing profit net of compensation is the same as maximizing profit. For more on this point, see Kopel and Pezzino [24].

  7. For surveys of the experimental evidence on loss aversion, see Kahneman et al. [21] and DellaVigna [10]. Greene [17] argued that loss-averse people are more likely to ignore cost-effective energy efficiency investment opportunities. This claim has received empirical support by Heutel [18] and Schleich et al. [27].

  8. The assumption that \(\frac {a}{b}-q_{i}\geq 0\) ensures that firm i’s strategy set (i = 1, 2) is compact. This condition has obvious economic meaning. It says that manager i would not select a quantity leading to a negative price when firm i is the only active firm in the market.

  9. If r = r2, then region III reduces to the point (1,1).

  10. We omit the expression of this threshold because it is very lengthy.

  11. The reader is referred to [2] for a full comparison and discussion of these two alternative specifications.

  12. Let \(K:\gamma _{i}\rightarrow \frac {k}{2}{\gamma _{i}^{2}}\) and \(A:\gamma _{i}\rightarrow \sqrt {\frac {2}{k}\gamma _{i}}\). Note that \(K\left (\sqrt {\frac {2}{k}\gamma _{i}}\right )=A\left (\frac {k}{2}{\gamma _{i}^{2}}\right )=\gamma _{i}\). Then, by the definition of the inverse function, we have A(γi) = K− 1(γi).

  13. A similar equivalence result between AJ and KMZ R&D models was shown by Amir [2] under the assumption that there are no innovation spillovers.

  14. These follow the same logic as earlier proofs and are available from the authors.

  15. Consider a representative consumer with utility given by \(U\left (q_{1},q_{2}\right ):=a\left (q_{1}+q_{2}\right )-\frac {1}{2}b\left ({q_{1}^{2}}+2\theta q_{1}q_{2}+{q_{2}^{2}}\right )+m,\text { with }a,b>0\text { and }\theta \in [0,1]\). The demand system (34) can be derived as the solution to the problem: \(\max \limits _{(q_{1},q_{2})}U(q_{1},q_{2})-{\sum }_{i=1}^{2}p_{i}q_{i}\). Namely, it follows from the first-order conditions pi = ∂U/∂qi, i = 1, 2.

  16. In the quantity-setting version of our model, reaction functions are downward sloping since \(\frac {\partial ^{2}M_{i}}{\partial q_{i}\partial q_{j}}=-b\theta <0\).

  17. In the price-setting version of our model, reaction functions are upward sloping since \(\frac {\partial ^{2}M_{i}}{\partial p_{i}\partial p_{j}}=\frac {\theta }{b\left (1-\theta ^{2}\right )}>0\).

References

  1. Allcott, H., Mullainathan, S., & Taubinsky, D. (2014). Energy policy with externalities and internalities. Journal of Public Economics, 112, 72–88.

    Article  Google Scholar 

  2. Amir, R. (2000). Modelling imperfectly appropriable Randamp;D via spillovers. International Journal of Industrial Organization, 18(7), 1013–1032.

    Article  Google Scholar 

  3. Anderson, S., & Newell, R. (2004). Information programs for technology adoption: the case of energy-efficiency audits. Resource and Energy Economics, 26(1), 27–50.

    Article  Google Scholar 

  4. Antle, R., & Eppen, G.D. (1985). Capital rationing and organizational slack in capital budgeting. Management Science, 31(2), 163–174.

    Article  Google Scholar 

  5. Barcena-Ruiz, J.C., & Garzon, M.B. (2002). Environmental taxes and strategic delegation. Spanish Economic Review, 4(4), 301–310.

    Article  Google Scholar 

  6. Cagno, E., Worrell, E., Trianni, A., & Pugliese, G. (2013). A novel approach for barriers to industrial energy efficiency. Renewable and Sustainable Energy Reviews, 19, 290–308.

    Article  Google Scholar 

  7. Cattaneo, C. (2019). Internal and external barriers to energy efficiency: which role for policy interventions. Energy efficiency, 12, 1293–1311.

    Article  Google Scholar 

  8. d’Aspremont, C., & Jacquemin, A. (1988). Cooperative and noncooperative R&D in duopoly with spillovers. American Economic Review, 78(5), 1133–37.

    Google Scholar 

  9. DeCanio, S.J. (1993). Barriers within firms to energy-efficient investments. Energy Policy, 21(9), 906–914.

    Article  Google Scholar 

  10. DellaVigna, S. (2009). Psychology and economics: evidence from the field. Journal of Economic literature, 47(2), 315–72.

    Article  Google Scholar 

  11. Fershtman, C., & Judd, K.L. (1987). Equilibrium incentives in oligopoly. The American Economic Review, 77(5), 927–940.

    Google Scholar 

  12. Fisher, A.C., & Rothkopf, M.H. (1989). Market failure and energy policy: a rationale for selective conservation. Energy Policy, 17(4), 397–406.

    Article  Google Scholar 

  13. Frederiks, E.R., Stenner, K., & Hobman, E.V. (2015). Household energy use: applying behavioural economics to understand consumer decision-making and behaviour. Renewable and Sustainable Energy Reviews, 41(C), 1385–1394.

    Article  Google Scholar 

  14. Gerarden, T.D., Newell, R.G., & Stavins, R.N. (2017). Assessing the energy-efficiency gap. Journal of Economic Literature, 55(4), 1486–1525.

    Article  Google Scholar 

  15. Gillingham, K., Newell, R.G., & Palmer, K. (2009). Energy efficiency economics and policy. Annual Review of Resource Economics, 1(1), 597–620.

    Article  Google Scholar 

  16. Gillingham, K., & Palmer, K. (2014). Bridging the energy efficiency gap: policy insights from economic theory and empirical evidence. Review of Environmental Economics and Policy, 8(1), 18–38.

    Article  Google Scholar 

  17. Greene, D.L. (2011). Uncertainty, loss aversion, and markets for energy efficiency. Energy Economics, 33(4), 608–616.

    Article  Google Scholar 

  18. Heutel, G. (2019). Prospect theory and energy efficiency. Journal of Environmental Economics and Management, 96, 236–254.

    Article  Google Scholar 

  19. Howarth, R.B., & Anderson, B. (1993). Market barriers to energy efficiency. Energy Policy, 262–272.

  20. Jaffe, A.B., & Stavins, R.N. (1994). The energy-efficiency gap: what does it mean? Energy Policy, 22(10), 804–810.

    Article  Google Scholar 

  21. Kahneman, D., Knetsch, J.L., & Thaler, R.H. (1991). Anomalies: the endowment effect, loss aversion, and status quo bias. Journal of Economic Perspectives, 5(1), 193–206.

    Article  Google Scholar 

  22. Kamien, M.I., Muller, E., & Zang, I. (1992). Research joint ventures and R&D cartels. The American Economic Review, 82(5), 1293–1306.

    Google Scholar 

  23. Koomey, J.G., & Sanstad, A.H. (1994). Technical evidence for assessing the performance of markets affecting energy efficiency. Energy Policy, 22(10), 826–832.

    Article  Google Scholar 

  24. Kopel, M., & Pezzino, M. (2018). Strategic delegation in oligopoly, Chap 10. In L. Corchon, & M. Marini (Eds.) Handbook of game theory and industrial organization, vol II (pp. 248–285): Edward Elgar.

  25. Pal, R. (2012). Delegation and emission tax in a differentiated oligopoly. The Manchester School, 80(6), 650–670.

    Article  Google Scholar 

  26. Sallee, J.M. (2014). Rational inattention and energy efficiency. The Journal of Law and Economics, 57(3), 781–820.

    Article  Google Scholar 

  27. Schleich, J., Gassmann, X., Meissner, T., & Faure, C. (2019). A large-scale test of the effects of time discounting, risk aversion, loss aversion, and present bias on household adoption of energy-efficient technologies. Energy Economics, 80, 377–393.

    Article  Google Scholar 

  28. Sklivas, S.D. (1987). The strategic choice of managerial incentives. The RAND Journal of Economics, 18(3), 452–458.

    Article  Google Scholar 

  29. Sorrell, S, O’Malley, E, Schleich, J, & Scott, S (Eds.). (2004). The economics of energy efficiency: barriers to cost-effective investment. Cheltenham: Edward Elgar.

  30. Sutherland, R.J. (1991). Market barriers to energy-efficiency investments, (Vol. 12 pp. 15–34).

  31. Tientenberg, T. (2009). Energy efficiency policy: pipe dream or pipeline to the future?. Review of Environmental Economics and Policy, 3(2), 304–320.

    Article  Google Scholar 

  32. Verhoef, E.T., & Nijkamp, P. (2003). The adoption of energy-efficiency enhancing technologies: market performance and policy strategies in case of heterogeneous firms. Economic Modelling, 20(4), 839–871.

    Article  Google Scholar 

  33. Vickers, J. (1985). Delegation and the theory of the firm. The Economic Journal, 95(Supplement: Conference Papers), 138–147.

    Article  Google Scholar 

Download references

Acknowledgments

We thank anonymous reviewers for their helpful comments and suggestions. We also thank the participants of the 18th International Symposium on Dynamic Games and Applications, 11th Workshop on Dynamic Games in Management Sciences, 6-ème Journées de l’innovation “Jinnov,” and the seminar participants at Center for Environmental Economics–Montpellier and the University of Valladolid for helpful discussions. The usual disclaimer applies.

Funding

The authors acknowledge the financial support of the French Agence Nationale de la Recherche (ANR). Mabel Tidball received funding from the project GREEN-Econ (ANR-16-CE03-0005) and the LabEx Entreprendre (ANR-10-LABX-11-01). Denis Claude received funding from the project RILLM (ANR-19-CE26-0008-01).

Author information

Authors and Affiliations

  1. LEDi, Université de Bourgogne-Franche Comté, Dijon, France

    Denis Claude

  2. CEE-M, Université de Montpellier, CNRS, INRAE, Institut Agro, Montpellier, France

    Mabel Tidball

Authors
  1. Denis Claude
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Mabel Tidball
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Denis Claude.

Additional information

Publisher’s Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Appendices

Appendix 1: Proof of Lemma 1

Let BRi(x) denote the set of decisions that are best-responses to a decision x for player i, i = 1, 2. Let \((\delta _{i}^{\text {c}_{k}},\delta _{j}^{\text {c}_{k}})\) be any pair of managerial incentives from region II(k), k = 1, 2. Assume that \((\delta _{i}^{\text {c}_{k}},\delta _{j}^{\text {c}_{k}})\) is an equilibrium point. Then, \(\delta _{j}^{\text {c}_{k}}\in \text {BR}_{j}(\delta _{i}^{c_{k}})\) where \(\text {BR}_{j}(\delta _{i}^{c_{k}})=[\ell _{j}(\delta _{i}),1]\). Since the game is symmetric, it must be the case that \(\delta _{i}^{\text {c}_{k}}\in \text {BR}_{i}(\delta _{j}^{c_{k}})\) where \(\text {BR}_{i}(\delta _{j}^{c_{k}})=[\ell _{i}^{-1}(\delta _{i}),1]\). Now, observe that \(\text {BR}_{i}(\delta _{j}^{c_{k}})\cap \text {BR}_{j}(\delta _{i}^{c_{k}})=\emptyset \) since these two sets lie on opposite sides of the 45∘ line. We conclude that \((\delta _{i}^{\text {c}_{k}},\delta _{j}^{\text {c}_{k}})\) are not mutual best responses. To complete the proof, observe that the same holds for any point \((\delta _{i}^{\text {c}_{k}},\delta _{j}^{\text {c}_{k}})\) in Region II(k), k = 1, 2.

Appendix 2: Proof of Proposition 3

The idea of the proof is illustrated in Fig. 6.

Fig. 6
figure 6

The idea behind proposition 3

Full size image

Consider any \(\delta _{j}\in \left [\tilde {\delta },1\right ]\). Then, δi is a best reply to δj if \(\pi _{i}^{\text {III}}\geq \pi _{i}^{\text {II}_{(j)}}(\delta _{i})\). Observe that firm i’s profit function is continuous in \(\tilde {\delta }\). Indeed, we have: \(\lim _{\delta _{i}\rightarrow \tilde {\delta }}\pi _{i}^{\text {II}_{(j)}}\left (\delta _{i}\right )=\pi _{i}^{\text {III}}\left (\tilde {\delta }\right )\). Now, observe that owner i’s profit function is strictly concave since:

$$ \frac{\partial^{2}\pi_{i}^{\text{II}_{(j)}}(\delta_{i})}{{\partial\delta_{i}^{2}}}=-\frac{r^{2}\left( 9b^{3}+16b^{2}k+10bk^{2}+2k^{3}\right)}{bk(3b+2k)^{2}}<0. $$
(46)

and reaches a maximum for

$$ \delta_{i}^{\star\star}=\frac{(b+k)(r(3b+k)(3b+2k)-abk)}{t\left( 9b^{3}+16b^{2}k+10bk^{2}+2k^{3}\right)}. $$
(47)

Hence, \(\pi _{i}^{\text {III}}\geq \pi _{i}^{\text {II}_{(j)}}(\delta _{i})\) if \(\delta _{i}^{\star \star }\geq \tilde {\delta }\) or, equivalently, if

$$ \delta_{i}^{\star\star}-\tilde{\delta} = -\frac{(3b + 2k)\left( ak(2b + k)^{2} - r(b + k)(3b + k)^{2}\right)}{t(3b+k)\left( 9b^{3}+16b^{2}k+10bk^{2}+2k^{3}\right)}\geq0. $$
(48)

The proof is completed by noting that condition (48) holds provided that r ≥ r4.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Claude, D., Tidball, M. A New Rationale for Not Picking Low-Hanging Fruits: the Separation of Ownership and Control. Environ Model Assess 26, 985–998 (2021). https://doi.org/10.1007/s10666-020-09735-5

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10666-020-09735-5

Keywords

Search

Navigation