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This study develops an analytical framework that takes a dynamic game approach to links between water markets and payments for watershed services (PWS). Using a case study of the eastern route of China's South-North Water Transfer Project (SNWTP-ER), this study explores the changing behavior of various stakeholders in the water market in different PWS scenarios and the economic rationality driving these behaviors. This study argues that linking water markets and PWS would improve the benefits for each stakeholder, thus making it an economic rationale that drives water suppliers to provide water quality maintenance and improvement services. In addition, introducing intensive incentives for PWS in water markets can make it possible to improve profitability and water quality simultaneously. Finally, linking water markets and PWS remains challenging because the differences in the nature of the two markets lead to divergent views on the distribution of their profits.
Sheng et al. (Sat,) studied this question.