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Distortionary effects of PPP loans on business competition

Author

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  • Steiner, Eva
  • Tchistyi, Alexei

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.

Suggested Citation

  • Steiner, Eva & Tchistyi, Alexei, 2024. "Distortionary effects of PPP loans on business competition," Journal of Financial Intermediation, Elsevier, vol. 59(C).
    • Handle: RePEc:eee:jfinin:v:59:y:2024:i:c:s1042957324000275
    DOI: 10.1016/j.jfi.2024.101099
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    More about this item

    Keywords

    PPP loans; Covid-19; Subsidies; Monopolistic competition;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • R32 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Other Spatial Production and Pricing Analysis

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