Individual participation and incentive coordination in watershed ecological compensation project: insights from...

The success or failure of executing the watershed ecological compensation (WEC) policy is primarily contingent on incentive designs. How do different contractual designs influence the actions of micro-individuals in WEC? How may individuals be enticed to engage in WEC project? Taking the first inter-provincial WEC-Xin'an River Basin (XRB) pilot in China as a case, this study investigates the impacts of government-oriented, market-oriented, and incentive-cooperation contracts on individuals' behavior based on the framework of Stackelberg games. Subsequently, differences in efforts and profits of diverse individuals are compared and analyzed for each contract. The case-specific numerical example is then utilized to validate theoretical outcomes and to support subsequent key insights. First, the government-oriented contract exhibits effectiveness in bolstering the efforts and interests of micro-individuals, whereas it also places the government under tremendous financial strain. Second, the market-oriented contract formed by the output contribution rate assists in overcoming deficiencies of excurrent government-oriented contract. But it remains controversial if, in the absence of government inspection, investors that devote more cooperative-efforts are not rewarded with further dividends, ultimately diminishing their enthusiasm for the WEC-XRB project. Lastly, the incentive-cooperation contract reinforced by market dominance is advantageous for improving the efficacy of water resource management under the existing government-oriented policy relying on command-and-control instruments.