Payment-for-Environmental-Services (PES) programs that translate external ecosystem values into direct financial incentives for local providers are gaining appeal globally as flexible approaches to inducing the voluntary provision of ecosystem services (ES). Working land PES programs that promote conservation in the agricultural production process have great potential to address the challenge of feeding growing global population while maintaining environmental sustainability. The importance of working land PES programs calls for efficient and effective design of public policies that facilitate the voluntary provision of ES. However, the design of current PES programs is rarely based upon a comprehensive understanding of the underlying supply and demand for ecosystem services. This dissertation thus aims to provide empirical insights for PES design by combining a supply-side cost function of farmers' willingness to adopt practices that provide enhanced ES with a demand-side social benefit function of residents' willingness to pay (WTP) for these ES. This dissertation is comprised of three essays. Essay 1 investigates the farmer supply of ecosystem services via four hypothetical PES programs using a stated preference survey of 3000 Michigan corn and soybean farmers. This essay complements existing literature by dividing the decision on whether to enroll in PES programs into two stages: whether even to consider enrolling in the program and, if yes, whether to participate. Analyzed using a double-hurdle econometric model, results suggest the first-stage willingness to consider decision chiefly depends on farm and farmer characteristics, while the second-stage decisions on whether and how much land to enroll in the program depend more on payment offer and benefit-cost criteria. Essay 2 examines public demand for environmental improvements measured by willingness to pay (WTP) for reductions in the number of eutrophic lakes and greenhouse gas (GHG) emissions using a stated preference survey of 6000 Michigan residents. This essay evaluates alternative methods of modeling WTP that incorporate respondent preference uncertainty. Using two different functional forms, it tests the sensitivity of WTP estimates to different functions. Results suggest that the conventional dichotomous choice model without uncertainty provides a reliable median WTP estimate that reflects the influence of key variables, although incorporation of self-reported uncertainty may to improve our understanding of the ES demand and the estimation efficiency of WTP. Essay 3 combines the farmer cost for providing ecosystem services with the public benefit from environmental improvements derived in first two essays in simulations to explore the empirical welfare-maximizing conditions for effective PES design. This essay uses non-parametric aggregation of benefit and cost, as well as biophysical linkages between farming practices and ES outcomes. Results show that the simplest cropping system with the least ES improvement is dominated by the other three systems, which offer similar economic welfare gains with varying trade-offs in cost and environmental performance. The choice of system largely depends on the goal of the PES program and evolving demand for specific ES by consumers. Allowing farms to choose different cropping systems that lower their individual costs or targeting farms that provide additional environmental services beyond their current practices would improve the cost-effectiveness of PES programs.
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