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Typically both local villagers (“insiders”) and non-locals (“outsiders”) extract products from protected forests even though the activities are illegal. Our paper suggests that, depending on the relative ecological damage caused by each group, budget-constrained forest managers may be able to reduce total forest degradation by legalizing “insider” extraction in return for local villagers involvement in enforcement activities. We illustrate this through the development of a game-theoretic model that considers explicitly the interaction between the forest manager who can combine a limited enforcement budget with legalization of insider resource extraction and livelihood projects such as bee keeping, insider villagers, and outsider charcoal producers.