early due to political disagreements and/or budget constraints. In the longer run, farmers often must shift
their agricultural practices and income-generating activities so that they do not rely on program
compensation payments. Otherwise farmers may become dependent on the incentive payments and upon
their termination may have to return the land to cultivation to survive, undoing the long-term benefits of
the program.
Despite the importance of understanding how farmers change their labor-allocation patterns in
response to these programs, few studies to date have examined how PES schemes have or have not
enabled farmers to optimally reallocate factor endowments and structurally change their
income-generating activities. Many critical questions remain. For example, how does a conservation
set-aside program induce farmers to shift labor allocations from on-farm production to off-farm work?
What is the effect of such programs on on-farm labor allocation? Do program impacts depend on the
endowment of the physical and human capital of the participants?
This study examines these questions by analyzing the largest PES experiment in the developing
world: the Grain for Green program in China. Following a series of devastating floods in 1998, China’s
government initiated a conservation set-aside program known as Grain for Green.1 The program’s main
objective is to increase forest cover on sloped cultivated land in the upper reaches of the Yangtze and
Yellow River basins to prevent soil erosion. When such land is available in a community and the
community is chosen to be part of the program, households can choose to set aside all or part of the
cultivated land on such slopes and plant them with tree seedlings.2 In return, the government
compensates participants with in-kind grain, cash payments for two to eight years based on the type of