Risk Management and Distributive Justice

36 Pages Posted: 27 Apr 2009

See all articles by Robert W. Kolb

Robert W. Kolb

Loyola University of Chicago - Department of Finance

Date Written: April 26, 2009

Abstract

This paper surveys the relationship between risk management, particularly financial risk management, and questions of distributive justice. Risk management proceeds by mitigation or transfer. When risk is transferred, questions of distributive justice are often relevant, but they are seldom addressed or even acknowledged by risk managers.

Questions of distributive justice in risk management arise with varying intensity in different market settings. This paper argues that perfect financial markets provide a context in which questions of distributive justice are seldom salient. In such markets, all traders have access to the same information about the item being traded and traders are generally anonymous. For the most part, I argue, these conditions justify ignoring questions of distributive justice. In imperfect markets, managing risk becomes relevant to distributive justice. Differential information between trading parties can quickly lead to a situation in which one party exploits another, particularly when the advantageous information is gained by some privileged position or by some illegitimate means.

As the degree of market imperfections increases, so does the importance of considerations of distributive justice. In non-financial markets generally, and in labor markets particularly, the firm’s efforts to manage risk often affect others in ways that may be unjust. Finally, the risk management activities of firms can create risks for parties far beyond those who actually manage the risk or participate in the risk management process. These affected parties can even include the public at large.

Keywords: derivatives, distributive justice, finance, justice, markets, risk, risk transference, social justice

JEL Classification: G1, G20, G38, K1, D81

Suggested Citation

Kolb, Robert W., Risk Management and Distributive Justice (April 26, 2009). Available at SSRN: https://ssrn.com/abstract=1395314 or http://dx.doi.org/10.2139/ssrn.1395314

Robert W. Kolb (Contact Author)

Loyola University of Chicago - Department of Finance

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Chicago, IL 60611
United States

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