Bank Incentives and the Effect of the Paycheck Protection Program 
In response to the COVID-19 crisis, the US government created the Paycheck Protection Program (PPP) as part of the Coronavirus Air, Relief, and Economic Security (CARES) Act. The program provided forgivable loans with the goal of preserving jobs at small and medium-sized businesses that were substantially affected by the pandemic. More than $525 billion was allocated through the program in 2020. The government empowered banks to approve or reject the loan applications to facilitate timely delivery of the funds. This authority enabled banks to target loans to their preferred borrowers. This paper explores how banks’ incentives affected the disbursement of PPP loans and the impact of the program on employment. To estimate the overall effect of the PPP on employment, the authors first analyze which firms and regions received loans at different stages of the program and then develop a model of loan allocation that is consistent with their empirical results.
Key Findings
- Firms in counties that were less affected by the COVID-19 pandemic received loans earlier in the PPP.
- Larger firms or those in sectors less affected by the pandemic also received loans earlier.
- The preceding findings reflect constraints in the supply of loans and not differential demand for them, as firms in sectors that were more affected by the pandemic were more likely to apply but significantly less likely to have a PPP loan approved at the beginning of the program.
- As more PPP loans were allocated, smaller firms and those in counties more affected by the pandemic were more likely to receive a loan, indicating that the PPP was much more effective in the later stages, when banks did not play a significant role in the allocation of the loans.
- The PPP increased employment by approximately 12.5 percentage points, which translates into the program saving about 7.5 million jobs.
Implications
The authors show that research designs based on bank or regional shocks in PPP disbursement, which are common in the empirical literature, cannot directly identify the overall effect of the program, that is, the effect of the PPP on the set of firms that received a loan through the program. The evidence of bank targeting implies that these designs can, at best, recover the effect of the PPP on a set of firms that is endogenous, changes over time, and is systematically different from the overall set of firms that ultimately received PPP loans. In addition, the authors provide a theoretical framework for estimating the effect of other lending facilities, credit subsidies, and loan guarantee programs that are implemented through the use of intermediaries and involve a dynamic selection into treatment.
Abstract
We assess the role of banks in the Paycheck Protection Program (PPP), a large and unprecedented small business support program instituted as a response to the COVID-19 crisis in the United States. In 2020, the PPP administered more than $525 billion in loans and grants to small businesses through the banking system. First, we provide empirical evidence of heterogeneity in the allocation of PPP loans. Firms that were larger and less affected by the COVID-19 crisis received loans earlier, even in a within-bank analysis. Second, we develop a model of PPP allocation through banks that is consistent with the data. We show that research designs based on bank or regional shocks in PPP disbursement, common in the empirical literature, cannot directly identify the overall effect of the program. Bank targeting implies that these designs can, at best, recover the effect of the PPP on a set of firms that is endogenous, changes over time, and is systematically different from the overall set of firms that ultimately receive PPP loans. We propose and implement a model-based method to estimate the overall effect of the program and find that the PPP saved 7.5 million jobs.