Rescue Policies for Small Businesses in the COVID-19 Recession

54 Pages Posted: 24 Mar 2022

See all articles by Alessandro Di Nola

Alessandro Di Nola

University of Konstanz - Department of Economics

Leo Kaas

Goethe University Frankfurt; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute)

Haomin Wang

University of Konstanz - Department of Economics

Date Written: March 2022

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, 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.

Keywords: COVID-19, Heterogeneous Firms, Business Subsidies, Paycheck Protection Program

JEL Classification: E22, E65, G38, H25

Suggested Citation

Di Nola, Alessandro and Kaas, Leo and Wang, Haomin, Rescue Policies for Small Businesses in the COVID-19 Recession (March 2022). SAFE Working Paper No. 343, Available at SSRN: https://ssrn.com/abstract=4064899 or http://dx.doi.org/10.2139/ssrn.4064899

Alessandro Di Nola

University of Konstanz - Department of Economics ( email )

Universitätsstraße 10
Konstanz, 78457
Germany

HOME PAGE: http://www.sites.google.com/site/alessandrodinolaphd/

Leo Kaas (Contact Author)

Goethe University Frankfurt ( email )

House of Finance
Theodor-W.-Adorno-Platz 3
Frankfurt, Hesse 60629
Germany

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Haomin Wang

University of Konstanz - Department of Economics ( email )

Konstanz, 78457
Germany

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