Annual forest loss in the Brazilian Amazon had in 2012 declined to less than 5,000 sqkm, from over 27,000 in 2004. Mounting empirical evidence suggests that changes in Brazilian law enforcement strategy and the related governance system may account for a large share of the overall success in curbing deforestation rates. At the same time, Brazil is experimenting with alternative approaches to compensate farmers for conservation actions through economic incentives, such as payments for environmental services, at various administrative levels. We develop a spatially explicit simulation model for deforestation decisions in response to policy incentives and disincentives. The model builds on elements of optimal enforcement theory and introduces the notion of imperfect payment contract enforcement in the context of avoided deforestation. We implement the simulations using official deforestation statistics and data collected from field-based forest law enforcement operations in the Amazon region. We show that a large-scale integration of payments with the existing regulatory enforcement strategy involves a tradeoff between the cost-effectiveness of forest conservation and landholder incomes. Introducing payments as a complementary policy measure increases policy implementation cost, reduces income losses for those hit hardest by law enforcement, and can provide additional income to some land users. The magnitude of the tradeoff varies in space, depending on deforestation patterns, conservation opportunity and enforcement costs. Enforcement effectiveness becomes a key determinant of efficiency in the overall policy mix.