Cross-country evidence on the allocation of COVID-19 government subsidies and consequences for productivity

Did government support delay bankruptcy during the pandemic?

“…Our results imply that government assistance potentially prolongs the lives of unproductive firms despite having healthy financial status, and delays their exit from the market. This supports the strand of literature that finds high-productivity firms are less likely to take up government support, which delays the exit of low-productivity firms (Kozeniauskas et al, 2022), which potentially explains the lower number of bankruptcies during the pandemic than before the pandemic (Bighelli et al, 2023). Finally, our results support the strand of literature that highlights policy mistargeting during the early phases of the pandemic (Cirera et al, 2021), and the overall ineffectiveness of government intervention for many countries (Fasano et al, 2022).…”

“…Finally, other studies highlight the long‐term detrimental effects of stringent lockdowns. Bighelli et al (2023) highlight the short‐term decline in aggregate productivity due to uncertainty and lower levels of capital investment, a finding which was supported by similar studies (Hoang et al, 2022).…”

“…The empirical evidence is inconclusive. On the one hand, some studies that show government support is associated with a favourable impact on smaller, younger, and private firms (El-Haddad & Zaki, 2023), especially firms that are more productive (Lalinsky & P al, 2022) and better managed (Bighelli et al, 2023;Groenewegen et al, 2021). Moreover, government intervention not only supported firms in the short run but was also found to support long-run development, as studies find that there are positive effects on corporate investment as a result of more positive expectations (Hoang et al, 2022).…”

“…On the other hand, some studies that find government support to be effective seem to be limited in advanced economies – European Union firms in the case of Bighelli et al (2023), Groenewegen et al (2021), and Lalinsky and Pál (2022), while Hoang et al (2022) examine US firms). Moreover, these studies also highlight some shortcomings as the productivity gains from such support are marginal at best (Bighelli et al, 2023), and that government support may be politically driven (El‐Haddad & Zaki, 2023). In fact, some studies find that while government support can maintain employment in high‐productivity firms, there was no increase in bankruptcy rates among low‐productivity firms (Kozeniauskas et al, 2022).…”

Fiscal capacity and commercial bank lending under COVID-19

“…For example, Honda et al (2022) studied the determinants of firms’ use of the business support programs provided by the Japanese government during the COVID-19 pandemic, finding that firms were more likely to have obtained subsidized loans the more their sales had fallen during the pandemic. Bighelli et al (2023) investigate cross-country evidence for five EU countries, Croatia, Finland, Netherlands, Slovakia, and Slovenia. They find that the pandemic led to a significant short-term decline in aggregate productivity and the direct support to firms had only a limited positive effect on productivity developments.…”