Can privatization be a catalyst for environmental R&D and result in a cleaner environment?

• Privatization cannot induce public and private firms to do more ER&D concurrently.
• A public firm may not undertake more ER&D than a private firm.
• If environmental damage is mild, environment can be restored after privatization.
• If environmental damage is high, environment may be worsened after privatization.

In this paper we explore whether privatization helps to catalyze a firm's environmental research and development (ER&D) and improve environmental quality. By defining ER&D as the effort undertaken by a firm to reduce its pollution per unit of output, we find in a duopoly framework that privatization cannot catalyze both public and private firms’ ER&D efforts simultaneously; it can increase one but decrease the other firm's investment, or it may even lower both firms’ ER&D investments. Moreover, when production causes severe environmental damage, or the imposition of environmental taxes poorly internalize the pollution externality, privatization may result in a poorer environment. For the sake of having a cleaner environment, policy-makers can impose higher environmental taxes on a highly polluting industry when it is being privatized.