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What happens when public resources are allocated by private actors, whose objectives may be imperfectly aligned with public goals? We study this question in the context of the Paycheck Protection Program (PPP), which relied on private banks to rapidly disburse aid to small businesses. We present a model suggesting that such delegation is optimal if delay is very costly, the variance of the impact of funds across firms is small, and the correlation between public and private objectives is high. We then use firm-level data to measure heterogeneity in the impact of PPP and to assess whether banks targeted loans to high-impact firms. Using an instrumental variables approach, we find that PPP loans increased business’s expected survival rates by 9 to 22 percentage points and modestly boosted employment. While banks did target loans to their pre-existing customers, treatment effect heterogeneity is sufficiently modest and the correlation between bank and public objectives seems sufficiently strong that delegation could still have been optimal given the high costs of delay.

The Targeting and Impact of Paycheck Protection Program Loans to Small Businesses