This paper examines the dynamic efficiency of direct and indirect payments for habitat conservation, as well as the preferences of donors who make the payments. A direct (or performance) payment is an annual payment to a landowner based on the number of hectares of undisturbed habitat that the landowner has preserved. An indirect payment is an annual payment to a landowner that subsidizes the use of other, non-habitat, inputs to an "eco-friendly" activity (e.g., eco-tourism). Direct payments are dynamically efficient. They can achieve a desired level of preserved habitat at lower levels of the other, non-habitat, inputs. Direct payments, however, may not be preferred by the donor who funds the conservation effort. The analytical model is calibrated to the Ranomafana National Park in Madagascar. For the amount of funds invested in Ranomafana by international conservation organizations, direct payments generate dramatically lower costs for the conservation agent and higher profit levels for the rural residents who control the fate of the ecosystem.

PES-1 (Payments for Environmental Services Associate Award)