Applications or Approvals: What Drives Racial Disparities in the Paycheck Protection Program?

Chernenko, Sergey V.; Kaplan, Nathan; Sarkar, Asani; Scharfstein, David

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Applications or Approvals: What Drives Racial Disparities in the Paycheck Protection Program?

Abstract: We use the 2020 Small Business Credit Survey to study the sources of racial disparities in use of the Paycheck Protection Program (PPP). Black-owned firms are 8.9 percentage points less likely than observably similar white-owned firms to receive PPP loans. About 55% of this take-up disparity is attributable to a disparity in application propensity, while the remainder is attributable to a disparity in approval rates. The finding in prior research that Black-owned PPP recipients are less likely than whiteowned recipients to borrow from banks and more likely to borrow from fintech lenders is driven entirely by application behavior. Conditional on applying for a PPP loan, Black-owned firms are 9.9 percentage points less likely than white-owned firms to apply to banks and 7.8 percentage points more likely to apply to fintechs. However, they face similar average approval disparities at banks (7.4 percentage points) and fintechs (8.4 percentage points). Sorting by Black-owned firms away from banks and toward fintechs is significantly stronger in more racially biased counties, and the bank approval disparity is also larger in more racially biased counties. Neither differences in PPP demand nor differences in eligibility rates are able to explain any of our findings. Racial disparities in program awareness and in the burden of application requirements (e.g., submitting all required documentation) both appear to be important drivers of application disparities, and the latter also helps to explain both bank and fintech approval disparities.

Keywords: discrimination; racial disparities; Paycheck Protection Program (PPP); bank lending; FinTech Lending; administrative burden;

JEL Classification: G01; G21; G28;