Applications or Approvals: What Drives Racial Disparities in the Paycheck Protection Program?

Abstract

We use the 2020 Small Business Credit Survey to study the sources of racial disparities in use of the Paycheck Protection Program (PPP). Black-owned firms are 8.9 percentage points less likely to receive PPP loans than observably similar white-owned firms. About 55% of this take-up disparity is explained by a disparity in application propensity, while the remainder is explained by a disparity in approval rates. The finding in prior research that Black-owned firms were less likely than white-owned firms to borrow from banks and more likely to borrow from fintech lenders is driven entirely by application behavior. Conditional on applying for PPP, Black-owned firms are 9.9 percentage points less likely than white-owned firms to apply to banks and 7.8 percentage points more likely to apply to fintechs. However, they face similar average approval disparities at banks (7.4 percentage points) and fintechs (8.4 percentage points). Sorting by Black-owned firms away from banks and toward fintechs is significantly stronger in more racially biased counties, and the bank approval disparity is also larger in more racially biased counties. Thus, to the extent that automation at fintechs reduces racial disparities in PPP take-up, it does so by mitigating disparities in loan application rates, not loan approval rates.

Keywords: discrimination, Paycheck Protection Program, bank lending, fintech lending

JEL Classification: G21, G23, G28, H81, H84