Individual participation and incentive coordination in watershed ecological compensation project: insights from China’s Xin’an River Basin pilot

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.