How transaction costs affect real estate developers entering into the building energy efficiency (BEE) market?

Buildings consume a major proportion of the electricity power in most cities, thus promoting building energy efficiency (BEE) will directly contribute to low carbon cities. Some studies suggest that the additional investment on BEE should be well paid off by higher selling prices or more savings in term of life cycle costing. Real estate developers are profit driven and working in a competitive environment. However, it appears that real estate developers are skeptical in entering the BEE market, which requires alternate theories to explain their behaviors. In this study, we attempt incorporating transaction cost economics (TCE) and game theoretical frameworks into the analysis. It suggests that the anticipated transaction costs entailed in the provision of BEE products due to such factors as bounded rationality, opportunism and contractual hazards, combined with the asymmetrical information in the BEE market have curtailed the developers’ interests. This study also leads to suggesting some policy recommendations to induce the developers entering into the BEE market by reducing the transaction costs.

► Introduce the concept of transaction costs in building energy efficient development. ► Game theoretical model explains why developers are skeptical in entering the BEE market. ► By increasing the market competition, developers will deliver more genuine BEE buildings. ► Interventions from governments is need to secure a fair market For BEE.