The objective of this study is to simulate the effect of population pressure, market integration, technological improvement and policy decisions on natural resource management in the hillsides of Honduras. To do so, we developed a bioeconomic model that combines dynamic linear programming with a biophysical model, then applied this model to a typical microwatershed. Over recent years, farmers from the selected microwatershed have followed a "vegetables-intensive" pathway of development. We ran different scenarios with historical data over the period 1975 to 1995 and then projected 25 years into the future from 1995 to 2020. The results of the bioeconomic model presented in this paper help to test a number of induced innovation hypotheses. Many of our hypotheses are confirmed, but some of the model's results challenge conventional wisdom. The simulation results confirm that technology improvements such as irrigation and new varieties can help overcome diminishing returns to labor due to population pressure. Population increases in La Lima had only a small effect on the condition of natural resources because the cropped area increased only slowly thanks to the intensification of production. The model confirms that the relationship between population growth and natural resource condition has a U-shaped structure. In the long term, population pressure is likely to lead to continuing improvement in the condition of natural resources. The hypothesis that improvements in access to markets increase per capita incomes was confirmed by our results, but improvements in access to markets do not necessarily promote land conservation because land values do not necessarily increase. The hypothesis that agroecological conditions are the most important factors determining incomes and natural resource condition is confirmed by the results. Past policy interventions such as market liberalization, road construction, construction of the potable water distribution system, crop variety improvement and extension services have all helped to increase incomes. However, the simulations suggest that had the government banned inorganic fertilizer, undertaken a land reform, or promoted dairy production during 1975 to 1995, these policies would not have been successful. The forward looking baseline scenario suggests that erosion will continue to increase if prices remain constant. If commodity prices decline, however, erosion will decline because farmers will reduce their production of vegetables during the rainy season. Conversely, an increase in inorganic fertilizer prices will lead to more erosion because farmers will use less fertilizer, obtain lower yields, and increase their cropped area.