The residential sector in Iran accounts for approximately 30% of the country’s total final energy consumption, making it the largest energy-consuming sector. This highlights the sector’s low energy efficiency. To address this issue, the present study examines the impact of an incentive-based subsidy policy on improving energy efficiency in residential buildings in Shiraz, using an agent-based modeling (ABM) approach. The primary objective is to develop a strategy that encourages building owners to retrofit their properties through subsidies, balancing governmental interests and owner satisfaction while minimizing potential conflicts. In this research, the government, building owners, and residential buildings are modeled as key agents. The decision-making behaviors of the government and owners are simulated using principal-agent theory, and the subsidy policy is optimized accordingly. Simulation results for the period 2021–2031 indicate that the optimized subsidy policy reduces energy consumption by 22.2% and enhances energy efficiency by 22.8% in retrofitted residential buildings. Furthermore, assuming a 10% annual increase in energy prices and conducting sensitivity analyses on five key parameters—homeownership rate, retrofitting demand rate, owner cost coefficient, economic benefit coefficient, and environmental benefit coefficient—the study finds that energy efficiency improvements are inversely related to owner costs but positively correlated with energy prices, homeownership rates, retrofitting needs, and economic and environmental benefits. These findings can inform the design of more effective energy optimization policies for the residential sector.
 
Aim and Introduction
Observations of energy consumption in both developed and developing countries reveal a gap between optimal and actual energy use, known as the energy efficiency gap. This issue has gained significant attention in recent years due to the growing global energy crisis. One of the main contributors to this gap is the presence of market barriers to energy efficiency, which can be divided into energy market barriers and market failures. Market barriers refer to factors that hinder improvements in energy efficiency, such as the low prioritization of energy issues, limited access to capital, and imperfect energy-efficiency markets. Market failures, including incentive misalignment, information asymmetry, externalities, and unpriced public goods, further restrict efficient energy use.
In the context of energy efficiency, market failures often involve incentive misalignment and information asymmetry—core aspects of the principal-agent problem. Incentive misalignment occurs when contracting parties pursue conflicting objectives, whereas information asymmetry arises when parties possess unequal levels of relevant information. Numerous studies have examined the relationship between principal-agent theory and energy efficiency, demonstrating that insufficient investment in energy efficiency can often be explained within this framework.
Market failures necessitate government intervention because they lead to inefficient resource allocation. According to neoclassical economics, addressing these failures can improve Pareto efficiency. In Iran, the residential sector accounts for approximately 30% of total final energy consumption, with natural gas and electricity serving as the dominant energy carriers. The residential and commercial sectors together contribute around 22% of total CO₂ emissions, with natural gas being the primary source. Given these figures, enhancing energy efficiency in residential buildings is essential to reducing overall energy consumption and greenhouse gas emissions.
Globally, governments have implemented various measures to improve building energy efficiency, including financial incentives, regulatory frameworks, and assessment-based policies. However, a persistent challenge in policy implementation lies in the differing objectives and information levels between governments and building owners. While governments aim to maximize social welfare, building owners prioritize personal utility, creating potential conflicts of interest. To mitigate this issue, governments must design effective policies that incentivize building owners to adopt energy-efficiency improvements.
This study investigates the impact of retrofit subsidies for residential buildings on energy efficiency—specifically, natural gas and electricity consumption—within the principal-agent framework using an agent-based modeling approach.
 
Methodology
This study develops an agent-based model to analyze the decision-making behaviors of various building owners and to optimize incentive policies for energy-efficiency retrofits, considering both building conditions and owner characteristics. Agent-based modeling has been identified as an effective method for addressing agency problems because it allows for the analysis of motivations and behaviors of self-interested participants. This approach enables the identification of optimal solutions to agency problems by simulating dynamic negotiations, interactions, and conflicts among stakeholders.
 
Results and Discussion
Simulation results for the period 2021–2031 indicate that providing optimal subsidies to building owners reduces energy consumption by 22.2% following retrofitting and increases energy efficiency by 22.8% in residential buildings. Assuming a 10% annual increase in energy prices and conducting sensitivity analyses on five parameters—homeownership rate, retrofitting demand rate, owner cost coefficient, economic benefit coefficient, and environmental benefit coefficient—show that energy efficiency improvement is inversely related to the owner cost coefficient and directly related to energy prices, homeownership rates, retrofitting demand rates, and economic and environmental benefit coefficients. These results can serve as a foundation for designing more effective policies aimed at optimizing energy consumption in the residential sector.
 
Conclusion
This study investigates the impact of government subsidy incentive policies on improving energy efficiency in residential buildings in Shiraz using agent-based modeling. The primary goal is to develop a policy framework that encourages building owners to renovate their properties through subsidies in a manner that maximizes both government benefits and owners’ utility. Specifically, the proposed model accounts for the diverse characteristics of buildings and their owners, providing policy recommendations tailored to different contexts based on these attributes.
The model employs a principal-agent theory-based approach to address agency problems in the renovation and energy-efficiency improvement process. Unlike previous studies that rely on empirical or econometric methods, which often fail to uncover the internal logic of these issues, this study models decision-making behavior within the principal-agent framework and simulates it on an agent-based platform.
The findings demonstrate that offering subsidies to building owners who accept government proposals for renovation results in substantial reductions in energy consumption and notable improvements in energy efficiency over the simulation period (2021–2031). Overall, this study confirms that agent-based modeling is a powerful tool for analyzing and designing optimal policies in the domain of building energy efficiency. Incentive-based policies are shown to play a pivotal role in achieving both environmental and economic objectives.