Ponzi schemes represent many of the better-known examples of the agency problem. Agency theory claims that a

Fantastic news! We've Found the answer you've been seeking!

Question:

Ponzi schemes represent many of the better-known examples of the agency problem. Agency theory claims that a lack of oversight and incentive alignment greatly contribute to these problems. Many investors fall into Ponzi schemes thinking that taking fund management outside a traditional banking institution reduces fees and saves money.

Some Ponzi schemes simply take advantage of consumer suspicions and fears about the banking industry even though established financial institutions reduce risk by providing oversight and enforcing legal practices. These investments create an environment where the consumer cannot properly ensure that the agent is acting in the principal's best interest. Many examples of the agency problem occur away from the watchful eye of regulators and are often perpetrated against investors in situations wherein oversight is limited or completely nonexistent.

Bernie Madoff's scam is probably one of the most notable examples of a Ponzi scheme. Madoff created an elaborate sham business that ultimately cost investors nearly $16.5 billion in 2009.2 But It isn't easy to determine when Madoff began to defraud his investors. The returns he promised his investors were higher than what most investment firms and banks were offering at the time. They were so promising that almost all of his investors looked the other way. Madoff put their money into a bank account and funded redemption requests with newly invested money.

His scheme unraveled when he could no longer pay his investors and confessed. Ultimately, Madoff was criminally charged and convicted for his actions. He was sentenced to serve a 150-year prison sentence and died behind bars at the age of 82 in April 2021

Explain the agency issue and agency cost referring to the case and suggest way how Ponzi schemes could have controlled Agency issue.