ARTICLE LINK – Structured Finance and the Social Contract: How Tranching Challenges Contractualist Approaches to Financial Risk

Journal: Business Ethics Quarterly

Author: Tobey Scharding

Publication Date/Info: Volume 29, Issue 1


Many ethicists argue that contract theory offers the most promising strategy for regulating risks. I challenge the adequacy of the contractualist approach for evaluating the complicated, novel risks associated with some structured financial products, particularly focusing on risks to third parties. Structured financial products like collateralized debt obligations (CDOs) divide a pool of financial assets into risk “tranches” organized from least to most risky. Investors purchase various tranches based on their individual risk-and-return preferences. Whereas contract theory holds that investment risks are ethically permitted (roughly) when everyone—including both parties directly involved in the investments and third parties—consents to them, structured financial products like CDOs show that even risks to which everyone consents are ethically problematic when they involve systemic risks of ruin.


What do you think?

Written by Dylan Watson


Leave a Reply

Your email address will not be published. Required fields are marked *





The Top Journals in Tax Research

ARTICLE LINK: How to Make Social Entrepreneurship Sustainable? A Diagnosis and a Few Elements of a Response