Did PPP Loans Distort Business Competition? Evidence from the Hotel Industry

We study the effects of PPP loans on business competition. Hit hard by the Covid-19 pandemic, the U.S. airport hotel industry offers a useful empirical setting in which we observe daily prices (room rates), market shares (occupancy), and demand (airport traffic). Older and less profitable hotels were more likely to apply for PPP loans. Hotels with active PPP loans reduced average daily rates, boosting occupancy and revenues per available room compared to competitors without PPP loans. PPP hotels reduced room rates more swiftly and aggressively in response to negative demand shocks and to price drops by non-PPP competitors. Those differences between PPP and non-PPP hotels were reversed once PPP loans expired. We rationalize our findings by introducing temporary cash subsidies into a model of monopolistic competition with differentiated products and heterogeneous production costs. Combining key model constructs with our empirical estimates, we calculate that for the U.S. airport hotel industry in aggregate, for every dollar of PPP subsidies spent, hotels that obtained PPP loans earned 72.3 cents in extra profits and those without PPP loans lost 70.5 cents. Those estimates imply that every dollar of extra profit to a given hotel with a PPP loan cost a given non-PPP competitor 18.6 cents. The insights of our model apply to many other sectors of the economy