In this paper we model the derivative strategies optimally undertaken by a manager (or head of a profit center in a hedge fund) when the detailed derivative positions taken are not contractible. We show that with commonly-used incentive features in the compensation structure, managers have incentives to implement complex derivative strategies that lead to a slight reduction in default probabilities (or a slight increase in performance measures) with a high probability at the cost of allowing for the possibility of disaster states involving large losses, although with a very small probability. Such disaster states cause systemic instability (similar to the experience of Long-Term Capital Management in September 1998). We discuss possible audit strategies, governance mechanisms and incentive structures that will ameliorate the probability of systemic instability arising from such incentives in a market with a rich enough menu of derivatives. We characterize the optimal intensity of audit effort with and without the presence of such derivative strategies. The dependence of the optimal audit intensity on the legal liability regime and different rules for apportioning the auditor's liability is derived. Our results also relate the optimal audit intensity to the cost and efficiency parameters of the audit firm.

Survey responses from Ph.D. graduates and thesis advisors are used to estimate the time required for the class of 2001-02 to earn a degree. Median time to earn the Ph.D. is 5.5 years, up from 5.25 years for the class of 1996-97. The time required to write a dissertation is a little longer than the time required to complete comprehensive examinations and coursework. Graduates who had their first child while in a Ph.D. program are estimated to finish almost one year later than others. Those with predominantly fellowship support finished about six months faster than those funded predominantly by a teaching assistantship, as did those whose dissertation was a set of essays rather than a single topic treatise. Americans who did their undergraduate work at either a Top-50 U.S. liberal arts or other U.S. college or university that does not offer a Ph.D. in economics finished faster than their counterparts who earned a bachelor’s degree from a U.S. university that offers a Ph.D. in economics. International students from predominantly English speaking countries finished faster than other students studying in the U.S. on temporary visas.

Matriculation in U.S. Economics Ph.D. Programs: How Many Accepted Americans Do Not Enroll? by T. Aldrich Finegan, Wendy A. Stock and John J. Siegfried. Published in volume 96, issue 2, pages 453-457 of American Economic Review, May 2006