14 January 2014This paper develops an analytical model of a REDD+ mechanism with an international payment tier and a national payment tier, and calibrate land users’ opportunity cost curves based on data from Sumatra. We compare the avoided deforestation and cost-efficiency of government purchases across the two types of contracts-fixed price and opportunity cost, and across two government types-“benevolent” and “budget maximizing”. Our paper shows that a fixed-price scheme is likely to be more efficient than an opportunity-cost compensation scheme at low international carbon prices, when the government is “benevolent”, or when variation in opportunity cost within land users is high relative to variation in opportunity cost across land users. Thus, a PES program which pays local communities or land users based on the value of the service provided by avoided deforestation may not only distribute REDD revenue more equitably than an opportunity cost-based payment system, but may be more cost-efficient as well.