SAFE Working Paper No. 343

Rescue Policies for Small Businesses in the COVID-19 Recession

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.