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Bank Incentives and the Effect of the Paycheck Protection Program

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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.

Suggested Citation

  • Gustavo Joaquim & Felipe Netto, 2021. "Bank Incentives and the Effect of the Paycheck Protection Program," Working Papers 21-15, Federal Reserve Bank of Boston.
    • Handle: RePEc:fip:fedbwp:93556
    DOI: 10.29412/res.wp.2021.15
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    1. Raj Chetty & John N Friedman & Michael Stepner & Opportunity Insights Team & Camille Baker & Harvey Barnhard & Matt Bell & Gregory Bruich & Tina Chelidze & Lucas Chu & Westley Cineus & Sebi Devlin-Fol, 2024. "The Economic Impacts of COVID-19: Evidence from a New Public Database Built Using Private Sector Data," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 139(2), pages 829-889.
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    Cited by:

    1. Berger, Allen N. & Demirgüç-Kunt, Asli, 2021. "Banking research in the time of COVID-19," Journal of Financial Stability, Elsevier, vol. 57(C).
    2. Falk Bräuning & José L. Fillat & J. Christina Wang, 2024. "Did High Leverage Render Small Businesses Vulnerable to the COVID‐19 Shock?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 56(6), pages 1367-1403, September.
    3. Gustavo Joaquim & J. Christina Wang, 2022. "What Do 25 Million Records of Small Businesses Say about the Effects of the PPP?," Working Papers 22-23, Federal Reserve Bank of Boston.
    4. J. Christina Wang, 2022. "The Main Street Lending Program: Who Borrowed and How Have They Benefited?," Working Papers 22-24, Federal Reserve Bank of Boston.
    5. Chunyu Qu, 2025. "Structure, Risk, and Access to Credit: Reassessment of the Paycheck Protection Program Effectiveness," Papers 2512.21547, arXiv.org.
    6. Lei Li & Philip Strahan, 2020. "Who Supplies PPP Loans (And Does it Matter)? Banks, Relationships and the COVID Crisis," NBER Working Papers 28286, National Bureau of Economic Research, Inc.
    7. Joshua Ballance & Melanie Qing & J. Christina Wang, 2021. "How Did the MSLP Borrowers Fare Before and During COVID-19?," Current Policy Perspectives 93055, Federal Reserve Bank of Boston.
    8. David Autor & David Cho & Leland D. Crane & Mita Goldar & Byron Lutz & Joshua Montes & William B. Peterman & David Ratner & Daniel Villar & Ahu Yildirmaz, 2022. "The $800 Billion Paycheck Protection Program: Where Did the Money Go and Why Did It Go There?," Journal of Economic Perspectives, American Economic Association, vol. 36(2), pages 55-80, Spring.

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    Keywords

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    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure

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