I measure the welfare costs of the principal-agent problem in the context of an energy efficiency appliance upgrade program. I find that the principal-agent problem turns an otherwise welfare-increasing program into a welfare-reducing program.
Introducing regulatory compliance flexibility could reduce consumer prices for appliances and compliance costs for manufacturers, as well as increase choices in the market while achieving important efficiency gains.
Bringing CAFE style flexibility to appliance standards can improve program efficiency if implemented carefully. A pilot program with limited trading scope can provide insights for future implementation.