Program design and heterogeneous treatment effects of payments for environmental services

Payments for environmental service (PES) programs have been increasingly promulgated worldwide recently to secure broader environmental benefits and provide financial assistance to environmental custodians. This study highlights the incentive design of PES and ecosystem providers' behavioral responses using a standard principal-agent model. Based on a theoretical model characterized by a screening game, I establish a hypothesis that as long as the PES conditionality is implemented and enforced effectively, ecosystem service (ES) providers more likely to participate in the scheme perform better in terms of environmental resource conservation. An empirical analysis in this study uncovers heterogeneous treatment effects in favor of the ES providers whose propensity scores for scheme participation are relatively high. This result lends strong support to the hypothesis that the strict conditionality embedded in the PES scheme dissuades potential participants at a high risk of noncompliance from participating the program, which helps enhance the PES additionality.