Subsidizing Failing Firms: Evidence from Chinese Restaurants

Can government stimulus or private-sector subsidization save small businesses in the COVID-19 crisis? Leveraging a large dataset on the chained restaurants in China, we find that rent reduction programs significantly increase survival rates. Rent reduction by the equivalent of a restaurant employee's annual salary can save at least one job. Rent reductions increase the financial strength of restaurants, and lead to strategic reactions of the restaurants to lean against the crisis, including increasing order discounts and promoting take-out and delivery services. Moreover, the effect of rent reduction is heterogeneous, increasing the monthly revenue by 69% for franchise-based restaurants, 51% for small company-owned restaurants, and 28% for large company-owned restaurants. Our results suggest that the organizational structure and the size of a firm can have large impact on the effectiveness and pass-through of financial stimulus programs, such as the Paycheck Protection Program.