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In this paper a structural model is developed to estimate a cost function that includes both an adverse selection and a moral hazard variable. It is shown how traditional cost function estimates may produced biased results if moral hazard is present. This gives an alternative reason to Feinstein and Wolak [The econometric implications of incentive compatible regulation, In: G.F. Rhodes, ed., Advances in econometrics, Vol. 9, 159-204 (JAI Press, Greenwich, CT, 1991)] of why scale economies may be overestimated in regulated industries. Parameter estimates from our model can be used to design an optimal contract or any other regulatory mechanism. We illustrate our approach using data from the Norwegian bus transport industry. Keywords: Asymmetric information; Regulation; Cost functions

The perception that privatization hurts the poor is growing and creating a backlash against the private provision of basic infrastructure services. At the same time, governments are finding themselves fiscally strapped, searching for ways to finance the large investments needed to expand services to the poor. In Latin America, a laboratory for privatization, evidence exists which sheds light on the privatization experience. This paper analyzes the channels through which the poor might either lose or gain from privatization, examines the evidence accumulated on what has actually happened, and then discusses the policy options available to decision-makers who want to increase efficiency while at the same time dealing with the infrastructure needs of the poor that have been identified as being important for their welfare. In that context, the issue of whether welfare considerations should form part of the regulatory approach to privatized services is examined. The paper's major aims are to shed light on the issue of who can and does benefit from privatization of utilities, and to guide policy-makers in the choices. Key words -- Latin America, privatization, infrastructure, utilities, poverty, private sector