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.