Assessing the effectiveness of Japan's community-based direct payment scheme for hilly and mountainous areas

The Japanese government introduced a direct payment scheme (DPS) for hilly and mountainous areas (HMAs) in 2000, with the aim of preventing further farmland abandonment in HMAs and compensating the farmers working in such disadvantaged regions for their costly production. Rural community members decide whether to participate in the DPS after taking account of its economic consequences. Using counterfactual-based empirical evaluation methods, we measure the extent to which a rural policy goal in Japan, namely the prevention of farmland abandonment, is achieved at the community level under the DPS framework. The pre-matching differences in the ratios of farmland abandonment, based on cross-sectional and longitudinal data, do not initially provide evidence to support the DPS's effectiveness or “additionality”. However, when confounding factors are considered, our estimation results lend strong support to the view that the DPS deters farmland abandonment. The most important driver of additionality is that the DPS targets communities with higher threat of farmland abandonment, which helps to prevent adverse participant selection from occurring. This can be supported by a rational inference that the DPS effectiveness would have been modest if farmlands on flat slopes were eligible for subsidization.