Few empirical studies have rigorously analyzed the downstream economic benefits of watershed protection to generate economic values of watershed services. By developing a conceptual framework and using household level economic and environmental data to illustrate its empirical tractability, this paper addresses the neglected, but critical, question of the importance of watershed services to farming communities in southeast Asia. A case study from Flores, Indonesia provides evidence of a substantive, quantified economic benefit of watershed service based on a fixed-effects regression model of water collection costs. The paper also offers lessons for researchers at all stages of data collection and analysis and a research agenda for enhancing our toolkit for policy analysis. This discussion of conceptual, empirical and methodological issues collectively suggests that ecosystem valuation can provide critical input into the design and evaluation of conservation and development policies in the tropics.