Distortionary effects of PPP loans on business competition

Eva Steiner and Alexei Tchistyi

Journal of Financial Intermediation, 2024, vol. 59, issue C

Abstract: We study the effects of PPP loans on business competition. We start by introducing temporary cash subsidies into a model of monopolistic competition with differentiated products and heterogeneous production costs. We test the predictions of our model in a sample of U.S. airport hotels for which we observe daily demand, prices, output, and profits. Consistent with model predictions, less profitable businesses were more likely to apply for PPP loans. Businesses with active PPP loans reduced prices, boosting output and profits relative to non-PPP competitors. Those relative differences were reversed once PPP loans expired. We calculate that, for every dollar of PPP subsidies, PPP hotels earned 72.4 cents in extra profits and non-PPP competitors lost 71.4 cents in aggregate. Our results suggest that the PPP initiative distorted competition, imposing significant costs on businesses that chose to forgo these loans.

Keywords: PPP loans; Covid-19; Subsidies; Monopolistic competition (search for similar items in EconPapers)
JEL-codes: D43 G28 G38 R32 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinin:v:59:y:2024:i:c:s1042957324000275

DOI: 10.1016/j.jfi.2024.101099

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