Foreign direct investment, business extortion and drug trafficking

Rafael S. Espinosa-Ramirez

International Journal of Economics and Business Research, 2023, vol. 26, issue 2, 237-254

Abstract: We develop a theoretical model in which a country hosts foreign investment in the presence of a drug dealer, acting as leader, and a drug seller, acting as a follower. A policy addressed to eradicate drug trafficking encourages the business extortion activity, and increase the extortion 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 concerning extortion paid by firms. In this case, when social marginal disutility is sufficiently larger than extortion payment, the government combats drug trafficking; otherwise, there is no policy at all.

Keywords: drug trafficking; foreign direct investment; FDI; business extortion; public policy; crime economy; drug consumption disutility; extortion payment; social marginal disutility; extortion cost. (search for similar items in EconPapers)
Date: 2023
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