Rescue policies for small businesses in the COVID-19 recession

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 
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, 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 grant policy. We find that the policy has only a small impact on aggregate employment because (i) jobs are saved predominately in less productive firms that account for a small share of employment and (ii) the grant induces a reallocation of resources away from larger and less impacted firms. Much of this reallocation happens in the aftermath of the pandemic episode. While a universal grant reduces the firm exit rate substantially, a targeted policy is not only more cost-effective, it also largely prevents the creation of “zombie firms" whose survival is socially inefficient.
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Metadaten
Author:Alessandro Di Nola, Leo Kaas, Haomin Wang
URN:urn:nbn:de:hebis:30:3-645717
URL:https://ssrn.com/abstract=4064899
DOI:http://dx.doi.org/10.2139/ssrn.4064899
Parent Title (English):SAFE working paper ; No. 343
Series (Serial Number):SAFE working paper series (343)
Publisher:SAFE
Place of publication:Frankfurt am Main
Document Type:Working Paper
Language:English
Year of Completion:2022
Year of first Publication:2022
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2022/04/04
Tag:Business Subsidies; COVID-19; Heterogeneous Firms; Paycheck Protection Program
Issue:March 2022
Pagenumber:54
Note:
Alessandro Di Nola thanks the German Research Foundation (grant No. SCHO 1442/2) for financial support.
HeBIS PPN:493449744
Institutes:Wirtschaftswissenschaften
House of Finance (HoF)
Center for Financial Studies (CFS)
Sustainable Architecture for Finance in Europe (SAFE)
Dewey Decimal Classification:330 Wirtschaft
JEL-Classification:E22 Capital; Investment; Capacity
E65 Studies of Particular Policy Episodes
G38 Government Policy and Regulation
H25 Business Taxes and Subsidies
Sammlungen:Universitätspublikationen
Licence (German):License LogoDeutsches Urheberrecht

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