Evaluating the Cost of Bad Regulation in Newly Privatized Sectors: The Chilean Case

Abstract

We analyzed a hypothesis suggesting that the newly privatized firms in Chile produced little if any important advantages as they would have performed poorly once privatized and the hypothesis that the regulatory problems were the consequence of obvious mistakes that could have easily be avoided. In spite of the fact that the only way to advance in this debate is by resorting to empirical estimates, no attempts have been made to define the nature of the regulatory problems that would question the convenience of privatization or empirically estimate the losses linked with obvious mistakes in the regulatory framework. In this paper we do both, analyze whether indeed obvious and easily avoidable regulation problems in Chile's newly privatized sectors exist and, if it is the case, we empirically estimate the costs associated with this kind of problems. Specifically, we explore the nature of the so-called regulatory problems in Chile's newly privatized sectors (Electricity, Telecomm, and Airlines). We measure the welfare costs due to regulatory procedures and compare them with the estimated efficiency gains arising from privatization.