Support for small businesses amid COVID‐19

Abstract

A sizeable proportion of enterprises, especially SMEs, assisted by the government, will fail to repay. Should a screening mechanism then be applied to deter those most likely to default from seeking such financial assistance? The answer depends on the relative weights attached to the competitive objectives of stabilisation and allocative efficiency. For this purpose, we develop a two-sector equilibrium model featuring oligopolistic small businesses with asymmetric private information and a screening contract. The sector adversely affected in a pandemic can apply for government loans to reopen later. A pro-allocation government sets a harsh default sanction to deter entrepreneurs with bad projects thereby improving productivity in the long run, at the cost of persistent unemployment, whereas a pro-stabilisation government sets a lenient default sanction. The optimal default sanction balances the trade-off between allocation and stabilisation. Finally, we solve for the optimal default sanction numerically and conduct comparative statics.

Grammatical mood and assessment of support policy effectiveness

“…They focused on programs addressed to small and medium-sized enterprises (SMEs) (Baker & Judge 2020;Brülhart et al, 2020). The justification for measures of that type was primarily the conviction that SMEs have lower financial resources and more difficult access to external funding (Goodhart et al, 2023). Estimates (Fairlie, 2020) indicate that in the period from February to April 2020, the number of active SMEs in the USA fell by 22%.…”

Discussion of “The Asymmetric Impact of COVID-19: A Novel Approach to Quantifying Financial Distress across Industries”

“…Their proposed methodology can offer near real-time information for the targeting of policy support for corporate sectors during crises. The targeting of policy support during unprecedented crises such as COVID-19 is notably challenging because in times of severe crises, lending to non-financial firms is subject to adverse selection (see asymmetric information issue in COVID support policies in Vardoulakis, 2020 , Li and Li, 2021 , Wang and Wang, 2021 , Goodhart et al, 2023 ). The government and even the lending banks may not observe the borrowing firms’ own funds and the actual cost firms incur due to the pandemic crisis, but borrowing firms themselves have better knowledge, if not full information, of these two variables.…”