Publications

Books Reviewed

1093

is considered in chapter 7. Estimates of carbon emissions from land use change in the Amazon, using a carbon emission model, show that deforestation caused carbon emissions in the range 128207 million tC/year during the rapid development period of the Amazon. The Amazonian economy generated $44 of GDP per ton of carbon emitted. These values are useful, but the chapter exhorts the cautious use of the results due to numerous limitations of data analysis. Chapter 8 evaluates global benets and costs of deforestation of the Amazon. It uses the total economic value (TEV) approach to estimate the benets. The chapter highlights the difculties in estimating TEV due to difculties in measuring the nonuse values such as biodiversity and ecological services. It avers that intensication can reduce deforestation, but this is constrained by numerous factors which are outlined in the chapter. Chapter 9 concludes the book by discussing necessary policy reforms at the local and international levels. These include technical matters of local forest management and the development of an international payments system to Brazil, to ensure sustainable use of the Amazon while at the same time, preserving its biological riches for the world community. The book has been written largely from the point of view of economists, and has used innovative combinations of econometric, statistical, simulation, and economic approaches. The general thesis is that many factors are at work in deforestation, and hence a combination of models is needed to understand the process. The book provides an interesting analysis of the deforestation and development using a rich data set for the period 19701996. The book has important sections devoted to the depiction of the deforestation problem in detail, which are useful independent of the more theoretical sections. A glaring omission in a dynamic study of deforestation is the lack of any reference to recent developments in particular, theories on environmental and institutional dynamics which posit that if environmental dynamics dominate institutional dynamics, the deforestation problem will be exacerbated. However, if institutional dynamics dominate environmental dynamics, then new institutions will emerge to protect the forest. Despite these shortcomings, the book addresses a topic of growing importance and is useful to researchers interested in model-

ing deforestation, students of forestry, and the policy-making community. Gamini Herath Deakin University Hsiao, Cheng. Analysis of Panel Data, 2nd Edition. Econometric Society Monograph No. 34. Cambridge: Cambridge University Press, 2003, 366 pp., $29.99. Econometricians have been waiting for the revised edition of Cheng Hsiaos pioneering book on panel data under the same title that came out in 1986. The second edition of Analysis of Panel Data, like its rst edition, encompasses all the important developments in econometrics of panel data in recent years. The tools and techniques to analyze different sorts of economic panel data have proliferated during the last twenty-ve years. Thus, in order to keep the size of the monograph reasonable, Hsiao had to choose only those topics and models that are central to the understanding of present day panel data models, with the hope that a reader can handle more specialized models once the basic panel data tools have been mastered. Hsiao has done a superb job not only in this selection but also in analyzing each chosen topic with rigor, intuition, and the discipline of a consummate econometrician that he is. The approach has been to provide a taxonomy of essential models, estimation methods, and statistical tests that are commonly used by applied econometricians. The book begins with a very useful warmup chapter explaining the advantages of panel data over purely cross-sectional or time-series data sets. Specic examples from labor market studies and international macroeconomics are presented to convince the reader that multidimensional panel data sets can do more than just controlling for individual unobserved heterogeneity. This chapter also introduces a number of very important panel data sets that are now widely used in both industrialized and developing countries around the world. Because the sources of sample variation critically affect the success in formulating and estimating many economic models, chapter 2 reviews the classical analysis of variances (ANOVA) and standard F-tests for intercept and slope heterogeneity based on one-wayANOVA. Since the majority of panel data studies work with variable intercepts and constant slopes,

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1094

November 2005

Amer. J. Agr. Econ.

the major part of the monograph is devoted to the analysis of this type of models. Static models with variable intercepts are covered in chapter 3, while the dynamic models are presented in chapter 4. The xed effects and random effects formulations are rigorously treated, and statistical tests are developed. Extensions to errors having heteroskedasticity and serial correlation are also covered. In recent years, there have been extraordinary developments in the analysis of dynamic models. Chapter 4 does an excellent job in covering this new research including the GMM estimation, treatment of initial conditions, transformed likelihood approach, and minimum distance estimation. Chapter 5 covers simultaneous equations models with panel data. Generalized two-stage and three-stage least squares estimation techniques are rigorously derived. This chapter, however, does not include analysis of dynamic models, and the distinction between singly exogenous and doubly exogenous variables in instrumental variables estimation. The chapter ends with a very lucid discussion of triangular structural models, with an example using the Gorseline data on 156 pairs of brothers. Chapter 6 extends the analyses of chapters 3 and 4 to slope parameters that vary over individuals and also over time. For the latter class of models, the Kalman lter methods are introduced in detail. For dynamic heterogeneous panel data models, Hsiao develops a Bayesian estimator using Markov-chain Monte Carlo methods that seem to perform very well even in small samples. Chapters 7 and 8 on discrete, truncated, and censored dependent variables are major additions in the second edition. Starting with standard Probit and Logit models with individual heterogeneity, chapter 7 goes on to analyze semiparametric and root-N consistent estimation methods. Dynamic models, the importance of initial conditions, and tests for state dependence versus heterogeneity are also covered. Chapter 8 introduces various extensions of Tobit model and selectivity models. Dynamic models are also considered. Chapter 9 discusses various types of incomplete panel data and the estimation methods for such panel data models. Estimation of distributed lags in short panels, analysis with rotating panels and pseudo panels are included in this chapter. Chapter 10 introduces a smorgasbord of recent topics in panel data models that includes simulation methods, panels with large

N and T, unit root tests, multilevel structures, errors in measurement, and models with crosssectional dependence. Each topic is discussed in sufcient detail, such that the reader will be prepared to explore more recent advances in methods dealing with panel data. Finally, chapter 11 is an epilogue on the basic issues that the monograph has emphasized throughout its chapters. In exploiting the full richness of the panel data and the advantages it can offer, a researcher has to look for possible limitations of the data and the model used. As Hsiao puts it, the usefulness of panel data in providing particular answers to certain issues depends on the compatibility between the assumptions underlying the statistical inference procedures and the data generating process. That sums up his concerns. Overall, the book is thoughtfully organized and crafted well from cover to cover. It develops an impressive set of analytical tools that will equip the reader to deal with the myriad of complications and the professional expectations that a researcher is expected to face in using currently available panel data sets and models. Its greatest strengths are the rigor and the clarity in the presentation of a series of increasingly challenging models and estimation methods. All estimation and test procedures have been supplemented by appropriate real life empirical examples, and most of the important derivations have been presented in the text, and also at the end of each chapter. However, the number of empirical examples is just about right, such that they did not clutter the theoretical pathways of the book. The author decided to exclude some advanced, but important panel data topics such as continuous time duration models, general nonlinear models, count data models, and models for the evaluation of social programs. Nevertheless, the book is mathematically sophisticated, and is not meant for the novice. For many it should be supplemented rst by a more introductory analysis of panel data models. However, it is a must read for any serious student of econometrics and applied social science researchers. The price of the book is also very reasonable. The 2nd edition of Cheng Hsiaos Analysis of Panel Data is an excellent source of the landmark developments in the econometric methodology of panel data during the last quarter century, and for demonstrating how they may be applied to real-world policy questions. I thoroughly recommend this book

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to any one interested in learning panel data econometrics at the graduate level. Kajal Lahiri State University of New York, Albany Wesseler, Justus, Hans-Peter Weikard, and Robert D. Weaver, eds. Risk and Uncertainty in Environmental and Natural Resource Economics. Edward Elgar, 2003, 330 pp. This book contains a series of papers presented at the 1992 International Conference on Risk and Uncertainty in Environmental and Resource Economics in Wageningen, The Netherlands. Natural resource economics now incorporates risk and uncertainty; and interest in such models is growing among academicians, policymakers, and practitioners. This collection of articles makes valuable contributions to the understanding of risk and uncertainty, and can serve as a supplemental source for graduate courses in natural resource economics, and it is a must read for professionals in the area. The book is divided into three parts: Part I deals with the importance of various types of environmental risk, uncertainty, and irreversibility. Part II explores the implications of risk, uncertainty, and irreversibility for economic development and specic environmental policies. Part III examines natural resource management problems and how the private sector can safeguard against risk and uncertainty of environmental conditions. The impact of climatic changes is inherently uncertain because long-term anticipated temperature changes must be forecast, and the magnitude and geographic distribution of these changes are uncertain. In chapter 2, Irreversibilities and Catastrophic Risks in Climate Change, Anthony C. Fisher reviews the literature and discusses policy options and timing in the presence of rigidities, or irreversibilities, in both physical and economic systems. The accumulation of greenhouse gases can be considered irreversible, as is the stock of capital accumulated for controlling emissions. Such irreversible actions need to clear a higher hurdle to pass a benetcost test. Biodiversity losses can also be irreversible. Irreversible changes in biodiversity are addressed by Hans-Peter Weikard in chapter 3 titled, On the Quasi-Option Value of Biodiversity and Conservation. Using a model of endogenous learning, optimal conservation paths

are derived contingent on the initial conservation decision and the resultant value of future information. If a species were to become extinct, the potential uses will never be known. The prospect of future information provides the economic incentive to spend more on initial conservation with, and devote fewer efforts to extensive long-run conservation. Species protection is equivalent to a delay in an investment that is irreversible, thus improving decision making through the accumulation of additional information. The second part of the book (chaps. 510) addresses policy responses to environmental risk and uncertainty. These chapters analyze policies and incentive systems that are instrumental in changing individual risk responses. Chapter 5 titled, Public-Private Environmental Conicts, is authored by Sung Hook Park and Jason Shogren. They consider the case of a national park that is treated as a public good by some citizens and a private good by others. The group that views the park as a private good includes rms who want to extract timber resources. The contest over property rights creates a competitive behavior within groups incorporating risk. This chapter also analyzes the double free-riding behavior that emerges within the two groups. The solution proposed by Park and Shogren is to make the sharing rule more effort dependent. The remainder of the chapter examines the efciency of outcomes associated with the proposed sharing rules. Chapter 6, authored by Robert McKelvey, Kathleen Miller, and Peter Golubtsov and titled, Fish Wars Revisited: A Stochastic Incomplete-Information Harvesting Game, concerns the instability inherent in cooperative management of transboundary sheries. This instability represents the risk associated with oceanic environmental change and climatic regime shifts. Chapter 6 explores the harvesting dispute between the United States and Canada over management of their binational Pacic salmon shery. By modeling this dispute, the authors are able to show that increased risk can lead to the breakdown of an efcient agreement. Further, better science will not automatically lead to more effective management and the protection of fragile sh stocks. Pollutants caused by capital accumulation, but reduced by abatement expenditures, are analyzed within a stochastic endogenous growth model proposed by Susanne Soretz in chapter 8 titled, Risk, Pollution Abatement and Endogenous Growth. The Impact of

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