Using incentives to coordinate responses to a system of payments for watershed services: The middle route of South-North Water Transfer Project, China

In any scheme of payments for watershed services, the incentive size can directly affect the watershed services which are provided by water-source areas. It is necessary to understand the payments for watershed services in the Middle Route of China's South-North Water Transfer (SNWT) from the perspective of the relations among the central and local governments. The distributions of interests among governments need to be coordinated under the Chinese authoritarian system, which is characterised by a combination of political centralisation and economic decentralisation. This paper analyses the interactions between the central and local governments in water-source areas to determine the watershed service efforts of local governments, using Stackelberg game models. In particular, the potential effects of incentives on payments for watershed services on the middle route are analysed. Numerical simulation is adopted to examine watershed service strategies, both with and without central government coordination of incentives. The results demonstrate the following: First, by designing and coordinating extra incentives, the central government could achieve its maximum interests without causing losses to the local governments. Second, extra incentives could increase the watershed service efforts of some local governments, thereby efficiently improving the water source quality of the Middle Route. Third, local governments with better watershed service capabilities are likely to improve their watershed services under coordination, thereby obtaining extra incentives.