Abstract
AbstractWe develop a theoretical model in which a country hosts foreign investment in the presence of a drug dealer, acting as a leader, and a drug seller, acting as a follower. A policy addressed to eradicate the drug trafficking encourages the kidnapping activity, and increase the security cost of firms. When the drug is not consumed in the host country the best policy is not to fight against drug trafficking. When the drug is consumed in the host country the optimal policy depends on the social marginal disutility of drug consumption respect to ransom paid by firms. In this case, when social marginal disutility is sufficiently larger than ransom, the government combats drug trafficking, otherwise, there is no policy at all.
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