Drug trafficking, corruption and foreign direct investment: Theory and evidence

Abstract

We develop a microeconomic model to explain why sanction policies used by developed countries have had ambiguous effects to reduce drug trafficking in developing countries. In the model, a country receives FDI depending on its government effort to reduce drug exports. However, local drug producers lobby and offer contributions whose impact depends on the level of government corruption. The government sets the level of enforcement against drug trafficking taking into account the contributions paid and the welfare of the local habitants. Analytically, we use the common agency theory to justify and explain diverse sanction policy outcomes. We also show evidence about the relationships among drug trafficking, corruption and FDI for some Latin-American countries.Drug Trafficking; FDI; Corruption; Latin America