Spatial Complementarity of Forests and Farms: Accounting for Ecosystem Services

Our article considers the economic contributions of forest ecosystem services, using a case study from Flores, Indonesia, in which forest protection in upstream watersheds stabilize soil and hydrological flows in downstream farms. We focus on the demand for a weak complement to the ecosystem services—farm labor—and account for spatial dependence due to economic interactions, ecosystem processes, and data integration. The estimated models have theoretically expected properties across eight different specifications. We find strong evidence that forest ecosystem services provide economically substantive benefits to local people and that these services would be substantially undervalued if spatial dependence is ignored.