Rescue policies for small businesses in the Covid-19 recession

Alessandro Di Nola, Leo Kaas and Haomin Wang

Review of Economic Dynamics, 2023, vol. 51, 579-603

Abstract: While the COVID-19 pandemic had a large and asymmetric impact on firms, many countries quickly enacted massive business rescue programs which are specifically targeted to smaller firms. Little is known about the effects of such policies on business entry and exit, investment, factor reallocation, and macroeconomic outcomes. This paper builds a general equilibrium model with heterogeneous and financially constrained firms in order to evaluate the short- and long-term consequences of small firm rescue programs in a pandemic recession. We calibrate the stationary equilibrium and the pandemic shock to the U.S. economy, taking into account the factual Paycheck Protection Program (PPP) as a specific policy. We find that the policy has only a modest impact on aggregate output and employment because (i) jobs are saved predominately in the smallest firms that account for a minor share of employment and (ii) the grant reduces the reallocation of resources towards larger and less impacted firms. Much of the reallocation effects occur in the aftermath of the pandemic episode. By preventing inefficient liquidations, the policy dampens the long-term declines of aggregate consumption and of the real wage, thus delivering small welfare gains. (Copyright: Elsevier)

Keywords: COVID-19; Heterogeneous Firms; Business Subsidies; Paycheck Protection Program (search for similar items in EconPapers)
JEL-codes: E22 E65 G38 H25 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://dx.doi.org/10.1016/j.red.2023.06.003
A subscription to ScienceDirect is required

Related works:
Software Item: Code and data files for "Rescue policies for small businesses in the Covid-19 recession" (2023)
Working Paper: Online Appendix to "Rescue policies for small businesses in the Covid-19 recession" (2023)
Working Paper: Rescue Policies for Small Businesses in the Covid-19 Recession (2022)
Working Paper: Rescue policies for small businesses in the COVID-19 recession (2022)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:red:issued:22-55

Ordering information: This journal article can be ordered from
https://www.economic ... ription-information/
red@elsevier.com

DOI: 10.1016/j.red.2023.06.003

Access Statistics for this article

Review of Economic Dynamics is currently edited by Loukas Karabarbounis

More articles in Review of Economic Dynamics from Elsevier for the Society for Economic Dynamics Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann (chuichuiche@gmail.com).