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Question: What is the principal-agent problem? Have any principal-agent problems have occurred at Peloton? If so, describe them and explain how they could have occurred

16 Oct 2022,10:37 PM

 

Managing Finance

  • The FT article on Peloton for the questions can be found at the following link:
  • https://www.ft.com/content/41c29068-ed4f-4ecb-b7e6-79fb27cec280.
  • The FT article reference is as follows:
  • Fontanella-Khan, J. and McGee, P. 2022. Activist investor urges Peloton to fire chief and explore sale. Financial Times. [Online]. January 24 2022. [Accessed February 11 2022]. Available from: https://www.ft.com/content/41c29068-ed4f-4ecb-b7e6- 79fb27cec280

 

REQUIRED

Read and answer the following 2 questions:

  1. a)  What is the principal-agent problem? Have any principal-agent problems have occurred at Peloton? If so, describe them and explain how they could have occurred. [10 marks] [200 words maximum]
  2. b)  What does the activist shareholder want Peloton to do? How would Peloton’s management be affected by the activist shareholder’s demands? [10 marks] [200 words maximum]

Expert answer

 

The principal-agent problem occurs when there is a conflict of interest between an agent, who is supposed to be acting on behalf of a principal, and the principal itself. This can happen in any situation where the agent has more information than the principal, or where the agent stands to gain personally from a decision that goes against the interests of the principal.

 

There are many possible solutions to the principal-agent problem, but they all involve some form of communication and collaboration between the two parties. In some cases, it may be possible for the agent to act in the best interests of the principal without any need for explicit instructions; in others, it may be necessary for the principal to provide clear guidance to the agent about what is expected.

 

This has happened at Peloton before. For example, maybe an agent didn't work very hard or did something that the principal didn't want them to do. This can cause problems because the principal might not get what they want and the agent might not get paid. To avoid this problem, Peloton needs to make sure that its agents are doing what it wants them to do. This can be done by setting clear expectations, providing training, and monitoring the agents' performance. If an agent does not meet the expectations, Peloton can take action, such as terminating the contract.

 

The principal-agent problem is when the person in charge, or the "principal," hires someone else to do a job for them. Sometimes this person, called the "agent," might not do what the principal wants them to do. This has happened at Peloton before.

 

For example, maybe an agent didn't work very hard or did something that the principal didn't want them to do. This can cause problems because the principal might not get what they want and the agent might not get paid.

 

To avoid this problem, Peloton needs to make sure that its agents are doing what it wants

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