Payments for Hydrologic Services (PHS) programs are increasingly used as a policy tool to provide incentives for upstream landowners to adopt land use activities that favor sustainable provision of high-quality water to downstream areas. However, the effectiveness of PHS programs in achieving their objectives and the potential for unintended (often undesirable) consequences remain poorly understood. We integrate results from ecohydrological and socioeconomic research to explore the impact of Mexico’s PHS program on the target hydrologic services and people’s decisions, behavior, and knowledge regarding forest conservation and water. Using central Veracruz as our case study, we identify areas of both synchrony and disconnection between PHS goals and outcomes. Mature and regenerating cloud forests (targeted by PHS) were found to produce enhanced hydrologic services relative to areas converted to pasture, including reduced peak flows during large rain events and maintenance of dry-season base flows. However, unexpectedly, these hydrologic benefits from cloud forests were not necessarily greater than those from other vegetation types. Consequently, the location of forests in strategic watershed positions (e.g., where deforestation risk or hydrologic recharge are high) may be more critical than forest type in promoting hydrologic functions within watersheds and should be considered when targeting PHS payments. While our results suggest that participation in PHS improved the level of knowledge among watershed inhabitants about forest–water relationships, a mismatch existed between payment amounts and landowner opportunity costs, which may contribute to the modest success in targeting priority areas within watersheds.

Combined, these findings underscore the complexity of factors that influence motivations for PHS participation and land use decisions and behavior, and the importance of integrating understanding of both ecohydrological and socioeconomic dynamics into PHS design and implementation. We conclude by identifying opportunities for improving the design of PHS programs and recommending priority areas for future research and monitoring, both in Mexico and globally.