observed measures of prices or costs (often the price-cost margin is the focus of estimation).<sup>31</sup> The second approach is to rely on indirect methods such as calculation of price-cost margins by sector across countries or gravity regressions to estimate what trade flows “should be” and back out an estimate of the tariff equivalent of policies from the difference between estimated and observed flows. A well-known problem with indirect approaches is that it is not possible to attribute price-cost margins or differences in trade volumes to specific policies – other factors such as the business cycle and natural barriers to trade/contestability will also play a role. Most of the literature has therefore pursued the first approach, although more use has been made of gravity regressions as data on bilateral trade in services has become available for OECD countries.

Information on policy can in principle be collected on a sector-by-sector basis, but is not available in the form of databases of the kinds that researchers can use when analyzing merchandise trade flows. Although there is much to complain about as regards the latter databases – see, e.g., Anderson and van Wincoop (2004) – the situation is incomparably worse for services. What would appear to be the most obvious source of information of services policies – trade agreements – is at best incomplete and at worst misleading given the limited coverage of country commitments.<sup>32</sup> Efforts to directly measure the extent of policy barriers on a sectoral and cross-country basis employ a policy index of some kind that is used to estimate the price, cost or quantity effects of policies. The policy indices are constructed by identifying existing policies towards entry/establishment and seeking to determine if policies differentiate between domestic and foreign firms. For example, in the case of distribution services, a country may have restrictions on nationality of workers, limits on operating hours, restrictions on size and location, rules that prevent advertising through specific types of product promotions, product carve outs for state monopolies, and limits on the temporary entry of workers (engineers, executives, etc.). What is needed is to identify the set of potentially pertinent policies and to assign relative weights to them, something that generally requires sectoral experts and is inherently subjective.<sup>33</sup> Once indices of policy have been constructed, the approach taken in much of the literature is to use this information by estimating their price and/or cost effects, controlling for standard determinants of performance for the sector concerned. A problem in doing this is to

> 31 Price comparisons of services across countries are generally inappropriate given the characteristics of services – the use of local inputs, extensive product differentiation and heterogeneity, etc.

> 32 As is often remarked in the literature, a major problem with the WTO (GATS) is that a positive list approach to scheduling commitments was used, which does not generate comprehensive and economically meaningful data on the measures that are imposed by countries (see Section 4 below).

> 33 See Dee (2006) and Deardorff and Stern (2006) for detailed surveys of existing work along these lines.

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