# **1. INTRODUCTION**

Deforestation is one of the leading sources of carbon emissions (Le Queré et al., 2015) as well as a major contributor to losses of biodiversity, watershed functioning and soil erosion. Environmental cash transfers, known as payments for ecosystem services (PES), are central to global efforts to reduce deforestation rates and improve environmental outcomes (e.g. Börner et al., 2017; Alix-Garcia et al., 2015). The UN Reducing Emissions from Deforestation and Forest Degradation (REDD+) is structured to financially reward developing countries that slow deforestation rates. Large-scale PES programs have been in place for at least five years in countries including Mexico, Costa Rica, the United States, China, Peru, Brazil, Vietnam and Ecuador.

PES programs support owners of environmentally valuable land by providing payments conditional on conserving land cover. The theory of change relies on the idea that landholders do not conserve forests or other vegetative cover because doing so is less profitable than converting the land to alternative uses, such as agriculture (e.g. Ferraro and Simpson, 2002; Alix-Garcia, de Janvry and Sadoulet, 2008; Alix-Garcia, Sims and Yanez-Pagans, 2015; Pagiola et al., 2015). Paying for conservation increases the profitability of maintaining forested land and thus may induce landholders at the margin to conserve. The popularity of PES stems partly from its voluntary nature, which contrasts with more traditional conservation mechanisms such as protected areas or laws prohibiting land conversion.

However, because PES is voluntary, it may attract applications by landowners who already would have conserved, limiting the additional environmental benefits it provides. PES programs also remain controversial within the global conservation community (e.g. Redford and Adams, 2009; Muradian et al., 2013; Schröter et al., 2014) because of concerns that they could make landowners worse off or could disrupt existing social structures. Although landowners accept PES voluntarily, these programs could still reduce welfare if participants do not fully understand risk-reward tradeoffs or underestimate program participation costs. In addition, while incentives to perform land management activities could support community collaboration, they might also undermine social capital by reducing intrinsic motivation for land conservation, disrupting norms of fairness within the community, or crowding-out contributions to other pro-social activities (Bowles et al., 2008; Schröter et al., 2014; Bruner and Reid, 2015).

This study contributes to these key empirical questions about the environmental and social impacts of PES by evaluating the 2011-2014 cohorts of Mexico’s federal payments for environmental services program. Mexico’s program provides an important global case to study because of its size, longevity, and efforts to improve program targeting. Specifically, we investigate program impacts on land-cover management and forest-cover change, household socioeconomic indicators including wealth, and community and household indicators of social capital. We estimate program impacts using a regression discontinuity (RD) design that compares accepted and rejected program applicants close to state- and year-specific cutoffs determined by the scoring system that prioritizes applicants.

Impacts on forest management, socioeconomic outcomes and social capital are based on survey data from 2016 for a representative sample of more than 800 community leaders and 8,000 households across 12 states. Impacts on forest cover change are derived from satellite-based forest cover loss data (Hansen et al. 2013; v 1.2) from 2011-2014 for all program applicants within 25 points of scoring 3