Optimal firm investment in security

In this paper, we analyze the problem of an individual firm that has to dea l with losses from criminal activities. It is assumed that the firm can pro tect itself by investing in security equipment. Two different models are co nsidered. In the first model, the firm has the possibility to spend money o n production and on security investment. More production increases revenue but also criminal losses, while the latter can be decreased by investing in security. It turns out that the optimal production level increases with se curity equipment and is determined such that marginal revenue, net from cri minal losses, equals marginal cost. For the optimal level of security inves tment it holds that, in the case of the existence of a long-run steady-stat e equilibrium, the properly discounted future reductions in criminal losses , which are due to an additional unit of security investment, exactly balan ces the initial outlay necessary to acquire an extra unit of security inves tment. In the second model, we extend this analysis by considering the effe ct that the firm's reputation has in the criminal world. If the firm has pr oduced a lot in the past without having invested in security equipment, thi s firm is known to be a fruitful target for criminals. Therefore, more crim inals will try to rob this firm, and this will increase future criminal los ses.