Distorting Effects of PPP Loans on Business Competition

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 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 compared to non-PPP competitors. Those differences were reversed once PPP loans expired. We calculate that, for every dollar of PPP subsidies spent, PPP hotels earned 72.3 cents in extra profits and non-PPP competitors lost 70.5 cents in aggregate. Our results suggest that the PPP initiative distorted competition, imposing significant costs on businesses that chose to forgo these loans.