Rice, the staple crop in northern Laos, has traditionally been grown in shifting cultivation systems (upland rice). Government policies and increasing population pressure have resulted in declining productivity of this system. Farmers need alternative and sustainable rice production systems to meet their rice needs. One alternative is the production of rice in flooded, terraced fields (montane paddy). This option is not new; however, farmers are developing these montane paddy fields much more now than in the past. The objectives of the study were to understand why farmers have begun developing montane paddy, the effect of paddy rice production on farmer livelihood activities, and the economics and costs associated with developing paddy land. The survey focused on 9 highland villages in northern Laos. In all villages, farmers reported declining upland rice yields. Between 1998 and 2002, the paddy area in these villages increased by over 240%. The main reasons cited for developing new paddy area were higher yields and less labor involved in paddy rice production. Paddy farmers had better rice security, grew more cash crops, owned more livestock, and had higher income. A cost–benefit analysis of developing paddy area suggests that paddy development is a good investment. Further research is required in identifying suitable areas for continued development, and accessing the environmental and social impacts of paddy development.