Piercing through the haze: Did PPP increase versus decrease bank efficiency?

We study profit and cost efficiency effects of the Paycheck Protection Program (PPP) for US banks that disbursed the funds. Using bank-level data combined with PPP bailout data and instrumental variables and other techniques for identification, our findings suggest that more intense PPP lending boosted bank profit efficiency but decreased cost efficiency. We uncover channels for profit efficiency improvements through higher revenues from core deposits and lending, and a labour-related channel for the decline in bank cost efficiency from hiring more employees and significantly increasing compensation expenses. Findings are robust to many checks and may have important implications for bank management and future government bailout policy design.