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.