Impact of direct payments on agricultural land use in less-favoured areas: evidence from Japan

We examine the effect of direct payments in less-favoured areas (LFAs) on agricultural land use and farm numbers in Japan, using community-level panel data. Direct payments, which take a unique form in Japan, are made to rural communities that have sloping farmland and are designated as ‘less-favoured’. We exploit whether a community is located in a designated area as an instrument for receipt of direct payments. Our instrumental variable estimates find that, although LFA payments fostered continued land use and prevented farmland abandonment through maintenance of farm households and household members, these effects are modest.