We study the environmental and economic consequences of introducing a program to compensate peasants of a small economy for the damage caused by wildlife. We show that the widely held belief that compensation induces wildlife conservation may be erroneous. In a partially open economy, compensation can lower the wildlife stock and result in a net welfare loss for local people. In an open economy, compensation can trigger wildlife extinction and also reduce welfare. The conditions leading to a reduction of the wildlife stock are identified and the implications for current and planned compensation programs are discussed.