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Conventional government cost-share programs to reduce agricultural nonpoint source pollution are falling short of water quality goals in the U.S. This dissertation presents lessons learned from the first 15 months of a field experiment that tests an alternative to conventional government programs. This alternative pays farmers as a group based on quantity and ambient quality of water flowing from their watershed. Farmers decide what, if any, abatement action to take and how to allocate payments among themselves. Three research questions were examined: (1) Prior to initiation of a field experiment, can water prices and a watershed payment formula be computed and would this payment provide an economic incentive to reduce pollution?; (2) Can this watershed payment formula account for background levels of pollution?; and (3) Does the watershed payment formula and institutional framework created during this field experiment elicit desired participation and abatement responses from farmers? For the first research question, a nonlinear, optimization model was developed to derive the minimum water prices necessary to induce water quality protection, by creating a tradeoff between income from water and income from agricultural production. This question was evaluated by comparing ex ante payment simulations with actual payments made during the field experiment. Actual payments were found to be within the simulated annual payment range. Because nitrate-Nitrogen (n-N) concentrations in surface water are closely related to agricultural production, this pollutant was used to measure ambient water quality in this field experiment. Question two was addressed with regressions of ex ante data simulations. Results showed that a ratio of n-N loading (index watershed/experimental watershed) did eliminate the influence of background pollution levels related to discharge. However, when using data generated during the field experiment, watershed discharge was found to influence both n-N loading and observed ratios. These findings were attributed to the drought conditions observed during the experiment. Examining question three, 53% of farmer households in the watershed participated during the first year of the field experiment. Participating farmers rent or own approximately 36% of the agricultural land in the watershed. A probit analysis of farmer participation found that education level increases the likelihood of participation, and that farmers who are cultivating “prime” farmland participate at lower rates. This decrease was attributed to farmer perceptions that their participation in this field experiment would inject additional uncertainty into their farm income. Given that “prime” farmland in the experimental watershed has been identified as a high n-N runoff area, a key gauge of successful n-N reductions in this experiment will be bringing farmers of prime farmland into the project. Group-level actions during the field experiment provided evidence that the farmers are willing and able to work jointly to address the issue of n-N runoff. The participating farmers developed an allocation scheme to distribute payments among themselves. This payment scheme included using a large portion of each monthly payment (90%) to provide cost share support to farmers who wanted to adopt runoff-reducing farm practices. To date, two cost share disbursements have occurred, and one participating farmer sought government cost share support for a manure shed to reduce runoff from his farm. Surveys of participating farmers indicate that some group mechanisms like peer monitoring and information sharing are occurring. Contrary to observations in the literature, farmers in this field experiment demonstrated the ability to develop and to implement their own abatement practices. The results of this field experiment provide support for undertaking additional field experiments. Multiplying the number of case studies available for review may be the best way of increasing the comfort level of policy makers towards a payment scheme like the one tested here. In addition, I recommend that future field experiments include a social science researcher who can use qualitative research methods to conduct personal interview surveys to glean additional insights into farmer decision-making from what are likely to be small, heterogeneous population.