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Abstract

In the case study of Indonesia we investigated possible effects of different types of market-based instruments (MBI), including rewards and taxes, on larger farmer (landlord) that adopts MBI and spillovers on working on his land under sharecropping arrangement another farmer (tenant). Multi-period expected value model with Monte Carlo simulation and Brownian motion was used. Findings showed that high prices of MBI would increase incomes of landlord but would reduce incomes of tenant through reduced working activities at landlord due to less cultivation of labor demanding crops. In most cases the incomes of landlord would be the under the MBI scenarios than in the business-as-usual scenario. If uncertainty in revenues is considered then MBI would reduce variability in incomes of both landlord and tenant. Rewards for increasing supply rather than taxation for reducing provision of ecosystem services resulted in higher rural incomes and provision of ecosystem services.

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