The empirics of regulatory reforms proxied by categorical variables: recent findings and methodological issues

Some regulatory reforms do not change just a specific signalthat can be represented by a quantitative continuous variable, such as a tax rate, a price cap, or an emission threshold. The standard theory of reform in applied welfare economics (going back to contributions by e.g. Ramsey, Samuelsonand Guesnerie)asks the question: What is the marginal effect on social welfare of changing a policy signal? However, reforms such as privatization, unbundling or liberalization of network industries areoftendescribedby ‘packages’shifting a policy framework. It isincreasinglyfrequent in theempirical evaluation of such reforms to use categorical variables, often in polytomous form, for instance describing unbundling steps (vertical integration, accounting, functional, legal, ownership separation)on a discrete numerical scale, such as those proposed by the OECD and other internationalbodies. We review recent econometric literature evaluating regulatory reforms using such variables (40papers) and we discuss somemethodological issues arising in this context.