Following the economic reforms in the early 90's, most of the south-eastern European countries (SEE) made efforts to establish agricultural extension services. However, a number of factors including tight governmental budgets, lack of experience, and the existence of vested interests have constrained the development of extension services. This paper examines the rationale for public funding of extension programs and evaluates the incentive structure for private and public provision of agricultural extension service in the SEE countries. It suggests a medium and long-term approach with a primary focus on institutional design. Two groups of factors that affect the private sector supply of extension are analyzed: (i) demand and supply-side factors that affect the profitability of the service and (ii) factors arising from the public-good nature of extension output, externalities, and moral hazards that affect the appropriation of returns of the service. The main conclusion is that the SEE countries should try to achieve a public-private extension balance by following a gradual approach toward privatization of the agricultural extension service. However, the paper advocates a continued important role for the public sector to correct for potential undesirable effects of private advisory services. (Contains 2 figures and 1 endnote.)