mitigation and deferral of social insurance contributions in the context of the current crisis bolstered the ability of firms to weather the economic downturn during COVID-19 (Cui et al., 2020; Chen et al., 2020).

By contrast, some policies such as the United States $2.2 trillion economic stimulus package called the Coronavirus Aid, Relief, and Economic Security (CARES) Act, in response to the economic fallout of the COVID-19 pandemic has been less effective in alleviating the cash constraints or improving outcomes of those they intend to assist.<sup>9</sup> What makes some programs effective while others less so? This section uses the BPS data to draw insights on the design of firm support programs, by alluding to the results on access to public programs and the potential mismatch between preferred instruments of support relative to that actually received by firms.

# **4.1 Rationale for supporting firms**

Apart from the obvious rationale of saving millions of jobs that are at the brink of being permanently lost, supporting firms during the pandemic is essential for several reasons (Jones et al., 2020). _First_ , there are efficiency gains via network externality from preserving existing relationships among numerous inter-connected entities in the economy. Preserving such organizational capital can also indirectly benefit upstream suppliers and downstream firms. _Second_ , the severity of the shock can endanger otherwise productive and viable firms. These firms deserve to be protected for both efficiency and fairness reasons. _Third_ , given the changes in demand and supply structure, adjusting to the "new normal" will necessitate public intervention to ensure coordinated reorganization and transformation of key industries. _Finally_ , in the absence of government intervention, financial frictions will limit the amount of credit available to the small but viable borrowers and likely limit their adjustment in response to the crisis.

Nevertheless, caution in providing government support is warranted because unanticipated shocks "cleanse" the pool of inefficient firms. The objective of preserving existing economic relationships may impede the creation of new, potentially superior ones, that is, Schumpeterian creative destruction (Schumpeter, 1942; Crespo Cuaresma et al., 2008). Government support also comes with the risk of propping up zombie firms - those that earn just enough money to sustain operation and service debt but are unable to invest and grow (McGowan et al., 2017). Given the difficulty of identifying and targeting the efficient and viable firms, especially during the crisis and in countries where institutional capabilities are weak, the risk of diverting resources away from otherwise-healthy firms can be high. Poorly designed policies may lead to misallocation of resources and overall a negative net effect. Lastly, government support programs are likely to impose disproportionately high transaction cost on both the part of the government and firms, especially the smallest firms, which could drive the latter away from availing the programs.

> 9Funds disbursed through the CARES Act’s Paycheck protection program (PPP) did not flow to areas more adversely affected by the economic effects of the pandemic, as measured by the declines in hours worked or business shutdowns, but most likely to less hard hit businesses and locations (Granja et al., 2020).

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