American Economic Association

Review
Author(s): Mark Gersovitz
Review by: Mark Gersovitz
Source: Journal of Economic Literature, Vol. 40, No. 1 (Mar., 2002), pp. 223-225
Published by: American Economic Association
Stable URL: http://www.jstor.org/stable/2698636
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 Book Revietvs
argument when one cannot separate the
economy into environmental and non-
environmental components. It considers two
types of feedback mechanisms from the envi-
ronment into the rest of the economy. One
entails a production externality. In the other,
consumption externality affects one's mar-
ginal rate of substitution between leisure and
consumption. Finally, chapter 9 examines
the feasibility of a double dividend in an
endogenous growth model.
Some remarks regarding the question of
second-best taxation of polluting goods: First,
the result that the optimal tax is equal to the
"Pigouvian tax" divided by the marginal cost
of public funds (MCPF), using the non-
polluting good as the numeraire, depends
crucially on the assumed structure of prefer-
ences, which calls for a uniform commodity
tax on non-polluting goods (as in A. L. Boven-
berg, and R. A. de Mooij 1994, "Environ-
mental levies and distortionarytaxation,"Am.
Econ. Rev. 84:1085-1089). Second, only a
modified version of this result applies to the
"tax differentiation" between polluting and
non-polluting goods, if labor is used as the
numeraire. The change in normalization not
only affects the so-called "Ramseyterm," but
also the MCPF. This happens because, unlike
the shadow cost of public funds, the private
marginal utility of income is dependent on
the normalization. A third and related obser-
vation is that this particular result does not
follow from an earlier result of Sandmo (A.
Sandmo, 1975, "Optimal taxation in the
presence of externalities," Swedish Journ. of
Econ. 77:86-98). Sandmo's result is correct,
but he uses a different definition of the
"Pigouviantax."Fourth, I would have liked to
see some discussion of the implications of al-
lowing for a general income tax when agents
are heterogeneous. Under this circumstance,
pollution tax terms embody a term that is ab-
sent in the traditional Ramsey setting. This
reflects the distortion on each household
type's consumption of the polluting good in
order to change the environmental quality as
a means of weakening an otherwise binding
self-selection constraint. This property im-
plies that second-best polluting tax may be
greater than, equal to, or smaller than the
Pigouvian tax under the same assumptions on
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223
preferences that in a Ramsey setting call for a
second-best tax smaller than the Pigouvian
tax (H. Cremer, F. Gahvari, and N. Ladoux
2001, "Second-best pollution taxes and the
structure of preferences," Southern Econ.
Journ., 68:258-280). Finally, the book would
have benefited from having a subject/author
index!
FIROuz GAHVARI
University of Illinois at Urbana-Champaign
Agriculture and Economic Growth: Theory and
Measurement. By Yair Mundlak. Cambridge
and London: Harvard University Press, 2000.
Pp. xiii, 479. $55.00. ISBN 0-674-00228-8.
JEL 2001-0409
This book is very valuable, and for a num-
ber of reasons. Most basically, Mundlak situ-
ates the agricultural sector within a two-
sector economy and discusses developments
within the sector and its interaction with the
other (industrial) sector and the international
economy. The approach sees the analysis of
aggregate performance as inherently needing
a degree of explicit disaggregation, and this
book focuses on the forces emanating from
agriculture. The book builds on much work
that Mundlak and his collaborators have done
in this vein for over thirty years. Certainly, he
has done as much as anyone to sustain the
dual economy approach to economic develop-
ment originated by W. A. Lewis, albeit with
differences from Lewis, most importantly on
the characterization of the supply of labor
from agriculture. The book contains both a
theoretical and empirical discussion.
An introductory first chapter uses cross-
country data to sketch some of the empirical
regularities suggested by the dual economy
approach: growth of agricultural production,
agriculture's share in GDP, factor usage in
the sector and factor productivity, agricul-
ture's terms of trade. The first big chunk
of the book develops the algebraic repre-
sentation of Mundlak's version of the dual
economy. The focus is the static general equi-
librium of the two-sector economy in open and
closed versions and its response to policies
such as food subsidies, restrictive trade poli-
cies, and food aid. Mundlak shows how the
static equilibrium responds to changes in
factor availabilities and changes in technology.
224 Journal of Economic Literature, Vol. XL (March 2002)
All in all, these first chapters are a nice
discussion of the basic properties of a two-
sector model and its comparative statics in
the tradition that is most developed in
international economics by such authors as
Jones, Kemp or Dixit and Norman. What dis-
tinguishes Mundlak's presentation is his em-
phasis on the development perspective, on
empirical regularities, and on a more nu-
anced attention to technological change with
the process of the South Asian Green Revolu-
tion in the foreground (ch. 6). This part of
the book and the first chapter of the next
one include exercises suitable for graduate
students.
The next part of the book treats dynamics
in a more explicit fashion. It puts decisions
on investment and labor migration into a
forward-lookingframework so changes in the
availability of factors at the aggregate or
sectoral levels derive from intertemporal op-
timization. There is a particularly detailed
account of labor migration from agriculture.
And these chapters continue to draw on the
empirical work of Mundlak and his collabora-
tors, such as their important estimates for
many countries of agricultural capital stocks
including livestock and orchards.
The third chunk of the book deals with the
agricultural production function and, relat-
edly, the agricultural supply function (in the
first chapter of part 4). It includes a detailed
discussion of the estimation of these impor-
tant relationships. Mundlak argues convinc-
ingly that a duality formulation is no panacea
and, in fact, may often be inferior to direct
estimation. Furthermore, he gives a really
masterful analysis of why empirical models
that he argues are misspecified produce the
results they do, and what one can infer about
how the relationships should be specified and
estimated. Then he provides his preferred
estimates.
This book is a really big one, but the sub-
ject of agriculture and economic develop-
ment is even bigger and there are certainly
topics that Mundlak ignores or skates over.
Readers will not find any discussion of all the
issues of the organization of agriculturalpro-
duction that have so pre-occupied many re-
searchers over the last two to three decades:
interlinked markets, sharecropping,efficiency
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wages, reciprocity and social capital. For in-
stance, on the question of "the intrafamily
distribution of benefits and contributions,"he
states, "These issues are not examined here
because their solution does not affect the ag-
gregate behavior in agriculture in any sub-
stantive way" (p. 258). This conjecture may
very well be correct, but I do not believe that
there is yet the research to say so. Differ-
ences in the organization of agriculture may
well affect fundamental aggregate parameters
like the elasticity of supply. Indeed, else-
where in the book Mundlak argues that direct
estimation of production and supply relation-
ships has the advantage over a conventional
duality formulation of not requiring the
assumptionof a profit-maximizingprice taker.
Agricultural taxation receives some atten-
tion but at perhaps too gross a level. No-
where is there a discussion of the issues or
evidence raised by such authors as Newbery
or Sah and Stiglitz. For instance, Mundlak
finds that a policy that subsidizes inputs
while taxing outputs "may make political
sense, but it lacks any economic sense" (p.
413). A policy that subsidizes all inputs other
than land while taxing output can, however,
substitute for a non-distortionaryland tax, or
at least approximate one. Even when only
some inputs can be subsidized (say because
the government cannot subsidize labor costs),
it may be worth doing so to minimize distor-
tions (or maximize revenue if that is a preda-
tory government's goal). And there are just
too many important aspects of, say, African
marketing boards to reduce their repre-
sentation to a deterioration in the terms of
trade of agriculture. For instance, these mo-
nopoly marketing institutions often consume
much of their revenues in bloated expenses
and fail to deliver inputs or evacuate outputs
in a timely manner.
But these last observations are about dogs
that did not bark. The big achievement of this
book is that Mundlak takes the model of the
dual economy seriously, and his and his col-
laborators' multidimensional work on its em-
pirical implementation is really without peer.
This book provides an overview of the theory
and a rich interpretation of the empirical evi-
dence. It is also by implication a call to fur-
ther work on this type of model, the mainstay
 Book Reviews
of development economics for the last fifty
years.
MARKGERSOVITZ
TheJohnsHopkinsUniversity
R Urban, Rural, and Regional Economics
Handbook of Regional and Urban Economics.
Volume 3, Applied Urban Economics. Edited
by Paul Cheshire and Edwin S. Mills. Amster-
dam; New York and Oxford: Elsevier Science,
North-Holland, 1999. Pp. xxiii, 1323. $125.00.
ISBN 0-444-82138-4. JEL 2000-0797
This volume presents updated reviews of
the literature on a number of mainstay issues
in urban economics, as well as fresh reviews
of topics that came to the fore in the late
1980s and early 1990s. Topics that are cov-
ered in this volume, but were not extensively
treated in volume 2, include agglomeration
economies, urban labor markets, zoning and
other land use controls, housing markets in
developing and "transition" economies, and
poverty in developing countries. Many of the
authors take pains to include work from out-
side of North America in their discussions of
evidence and institutions, giving the volume a
welcome international flavor.
The volume consists of 13 chapters, and is
organized into four parts. Part 1: Spatially Re-
lated Research opens with a chapter by Paul
Cheshire on "Trends in Sizes and Structure
of Urban Areas." In this chapter, Cheshire
weaves together a number of issues that bear
on the economics of city sizes, including the
rank size rule, modern urban geography, the
intra-urban location of jobs and households,
and ex-urbanization and other recent location
patterns. This is followed by Michelle White,
who, writing on "Urban Areas with Decen-
tralized Employment," surveys the basic mo-
tivations for the suburbanization of firms,
models of urban economies with decentral-
ized employment, wage gradients, and the
controversy arising from Bruce Hamilton's
provocative treatment of "wasteful commut-
ing." Joseph Gyourko, Matthew Kahn and
Joseph Tracey update the Bartik and Smith
paper from volume 2 in their chapter "Qual-
ity of Life and Environmental Comparisons."
The authors explore recent developments in
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225
the Rosen/Roback model of interurban wage
and rent capitalization,carefully review econo-
metric issues that arise in the estimation of
quality of life indices, and consider related
issues that arise in hedonic studies of the
value of environmental amenities. The clos-
ing chapter in part 1, "AgglomerationEcono-
mies and Urban Public Infrastructure," by
Randall Eberts and Daniel McMillen, skill-
fully reviews both the theoretical and empiri-
cal literatures on agglomeration economies,
and ties these topics to the debate about the
relationship between public infrastructure
and productivity.
Part 2: Urban Markets opens with a very
ambitious review by Graham Crampton of
the huge literature on "urbanlabor markets."
Some of the issues Crampton considers in-
clude the definition and spatial extent of local
labor markets, simultaneous residential and
work place location choice, spatial issues in
job search, the impacts of family structure
and demographics on labor market outcomes,
and the spatial mismatch hypothesis. Next,
Christine Whitehead, in "Urban Housing
Markets:Theory and Policy," gives a conven-
tional review of the economics of the housing
market, with an emphasis on issues that im-
pact the design and efficacy of housing poli-
cies. Stephen Sheppard, in a chapter titled,
"Hedonic Analysis of Housing Markets"gives
a very careful discussion of the theory of
hedonic prices, including its implication for
demands for individual attributes, and dis-
cusses both parametric and non-parametric
approaches to the estimation of hedonic mod-
els. Part 2 closes with a chapter by Alan W.
Evans on "The Land Market and Government
Intervention." With an emphasis on non-
North American policies and studies, Evans
reviews the recent empirical literature on
zoning, policies for the preservation of his-
torical properties, urban growth controls, im-
pact fees, and policies that affect the supply
of urban land.
Part 3: Urban Development and Develop-
ing Countries opens with an impressive
account by Charles Becker and Andrew Mor-
rison of the many economic issues and prob-
lems that relate to urbanization in transform-
ing economies. Their review, which stretches
to 117 pages, discusses basic urbanization