A dynamic general equilibrium model of a watershed is presented. The model is used to examine empirical economic and environmental linkages between upland and lowland communities in a Philippine watershed. The model shows how lowland labor market opportunities are important determinants of upland land-use patterns, erosion rates, and sedimentation damages in a lowland communal irrigation system. The model uses data from 1994 and 1996 surveys of low-income upland and lowland farmers. Wages in the model are determined via the interaction of labor supply by upland households and labor demand by lowland farms.

Erosion rates are endogenouslydetermined by the land allocation decisions of upper-watershed residents. Results show how the evolution of a labor market can provide long-run economic benefits to watershed residents. Lowland agricultural development is seen to be a potentially beneficial strategy for watershed protection, but outcomes depend on labor market structure and characteristics of upland-lowland interactions.

Implications for policies to protect tropical watersheds are discussed.