The uplands of Northern Vietnam are home to the poorest of the rural poor. Inhabitants of these areas are faced with low agricultural productivity and the ecosystem services such as food production for marginalized populations, biodiversity reservoirs, and watershed regulating functions have been under increasing pressure due to decollectivisation and the following redistribution of the land, liberalization of markets and a rapid population growth. To partly reverse the threat posed to the ecosystem services, we analyzed the impact of alternative schemes on farm revenues that would set aside cultivated land for forest natural re-growth. Using mathematical programming we developed a farm household model in which we investigated scenarios where some land in the sloping area of the catchment is set aside for forest natural re-growth (which aims at restoration of watershed functions), while additional land is made irrigable in the lowland compartment of the farms. In the first part of this thesis we will impose different implementation and compensation schemes for this land set-aside schemes and analyze their effects on both a household as well as a village level. In the second part of this thesis we will analyze the different land set-aside schemes with the help of the theory on Payment for Environmental Services (PES) that examines the cut-off point where farmers will voluntarily set-aside sloping land in order to get more access to water in the bottom valleys. The compensation schemes are analyzed from two perspectives; on the one hand they will improve collective water infrastructures so that more water is made available in the lowlands; on the other hand they will individually reward farm households by allocating new terrace land. The impacts on land use, individual farm revenues, per head revenues and village revenues were analyzed. This led us to conclude that relatively small increases in irrigable land in the lower compartments are necessary to compensate for t