"Although private forest use in Brazil has been regulated at least since the Forest Code of 1965, cumulative deforestation in the Brazilian Amazon reached 653,000 km2 by 2003 (INPE 2004). Much of this deforestation is illegal. In 1999, the State Foundation of the Environment (FEMA) in Mato Grosso introduced an innovative licensing and enforcement system to increase compliance with land use regulations. If successful, the program would deter deforestation that contravenes those regulations, including deforestation of riverine and hillside forest (permanent preservation areas), and reduction of a property's forest cover below a specified limit (the legal forest reserve requirement). This study seeks to assess whether introduction of the program affected landholder behavior in the desired direction. Simple before/after comparisons are not suitable for this purpose, because there is considerable year to year variation in deforestation due to climatic and economic conditions. Nor is it valid to assess program impacts by comparing licensed and unlicensed landholders, even though the program focused its enforcement efforts on the former. This is because, first, landholders with no intention of deforesting may choose to become licensed; and second, unlicensed landholders may be deterred from deforestation by the mere existence of a serious program that aims for universal licensing. To meet these challenges, the study applies a difference-in-difference approach to geographically explicit data. It looks for, and confirms, post-program declines in deforestation in high-priority enforcement areas relative to other areas; in more easily observed areas relative to less easily observed areas; and in areas of low remaining forest cover (where further deforestation is probably illegal) relative to high remaining forest cover. Thus, even against a backdrop of higher aggregate deforestation (driven in part by higher agricultural prices), there is evidence that the program in its early stages (before 2002) did shift landholder behavior in a direction consistent with reduced illegal deforestation. (The legality of deforestation was not however directly observed). The study hypothesizes that this behavioral change resulted from an initial perception of increased likelihood of the detection and prosecution of illegal deforestation, following announcement of the program. The study does not assess Mato Grosso's new system for environmental regulation (SLAPR) impacts following the change of state administration in 2003. "--World Bank web site.