Incentivizing banks as conduits: evidence from the Paycheck Protection Program

Abstract

How should policymakers use banks as conduits for government assistance programs? This study delves into this question within the context of the Paycheck Protection Program (PPP), which assisted small businesses affected by the COVID-19 pandemic. Using the bunching estimation approach and leveraging the incentive discontinuities, this paper estimated loan supply elasticities w.r.t. commissions and borrowers’ responses to loan forgiveness probabilities. I find evidence that expectations of loan forgiveness policies influenced borrowers’ actions, while commissions had no discernible impact on lender behavior.