RDP 2014-07: International Trade Costs, Global Supply Chains and Value-added Trade in Australia Appendix E: Measures of Sectoral Regulation

The OECD sectoral regulation indices are constructed based on regulations across two broad groups of sectors. The first group consists of network sectors, including energy, transport and communications. These indicators are computed for a time series spanning from 1975 to 2007. The second group consists of regulations in retail trade and professional services. These indicators are computed for three years: 1998, 2003 and 2007.

The indicators have been developed to measure how changes in regulations in one sector affect other sectors of the economy that use the output of that sector in production. These flow-on effects depend on i) the extent of anti-competitive regulation in a given sector and ii) the importance of the sector as a supplier of intermediate inputs to other sectors.

The regulation indices are calculated as:

where the variable R_jct is an indicator of anti-competitive regulation in industry j for country c at time t and the weight w_ijc is the total input requirement of sector i for intermediate inputs of sector j in country c. Essentially, this weight measures the importance of sector j in supplying intermediate inputs to sector i. Total input coefficients are produced for 38 sectors in 29 OECD countries. The regulation indices are scaled to be between 0 and 100, with higher values representing greater regulation.

The regulation indices are constructed for each country using the input-output structure of the economy in the year 2000. Holding the input-output structure of the economy constant over time ensures that changes in the indices reflect policy changes and not changes in the weights. It also helps to minimise any endogeneity between regulation and the input-output structure of the economy. The methodology behind the indicators is described in more detail in Conway and Nicoletti (2006).