Upstream-downstream transactions and watershed externalities: Experimental evidence from Kenya

Where environmental policies or projects seek behavioral change, understanding underlying norms and preferences is essential to securing environmental outcomes. This study models a payment for environmental services intervention in an experimental field laboratory in Nyanza Province, Kenya. Upstream and downstream individuals are paired in a standard investment game, in which the upstream mover's investment represents land use decisions and the downstream mover responds with a choice of compensation payment. The experimental intervention introduces an enforcement treatment on the downstream movers' compensation decisions for a single round. Underlying social preferences and identity appear to shape individual transactions between upstream and downstream individuals. Upstream first movers are sensitive to the removal of the enforcement on their downstream partners in the second round, and make decisions consistent with crowding out of social preferences. The results suggest that environmental interventions may affect resource decisions for individuals who are not themselves direct targets of enforcement.