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Distortionary Effects of PPP Loans on Business Competition: Evidence From the Hotel Industry – Image Credit National Restaurant Association
The Covid-19 pandemic that emerged in 2020 caused a deep, global economic crisis that was especially difficult for the hotel industry.
The U.S. government responded to this crisis with an emergency set of economic relief measures on a near-unprecedented scale. The Small Business Administration’s $953-billion Payroll Protection Program (PPP) was a key part of that response.
In an effort to reduce layoffs, the PPP offered temporary payroll subsidies in the form of forgivable loans for small businesses.
Given the significant cost involved, it is important to evaluate the economic impact of the PPP initiative. While the program was clearly beneficial for businesses that received PPP funds, we found a potential unintended consequence of the PPP—namely, the distortion of business competition.
Our study assesses how equilibrium market outcomes change when firms benefiting from government subsidies compete against non-subsidized firms.
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