Verify Now, Save Later? Advance Screening to Mitigate Fraud

• In Event: Beyond Regulation: How States Influence Corporations (Virtual Session)

Abstract

Advance screening is a common feature of fraud and corruption mitigation efforts around the world. By screening in advance potential participants in public programs for adherence to relevant program criteria, individuals or firms likely to commit acts of malfeasance are excluded before injury to the public fisc has taken place. In spite of its potentially important role in maintaining the integrity and viability of public programs, there is a paucity of empirical research on the efficacy of advance screening. This paper fills this gap by examining the impact of advance screening in reducing fraud in one of the largest economic relief programs in US history: The Paycheck Protection Program (PPP), a $953-billion small business stimulus program adopted as part of the CARES Act signed into law on March 27, 2020. Our data consists of the full corpus of nearly 11.5 million PPP loans allocated over the course of the program. We study the impact of monitoring via advance screening on fraud in the PPP by exploiting temporal variation in the documentation standards applied to loan applications for loans of different values. In particular, given variation in screening by program phase and loan value, we employ a difference-in-difference estimation strategy to compute the impact of advance screening on serious irregularities in the receipt of loans from the PPP. In our preferred specification, we incorporate lender fixed effects, thereby controlling for variation in oversight due to lender characteristics. We utilize as outcomes three types of irregularities that are indicative of (though not dispositive of) fraudulent intent on the part of the borrower: the receipt of a loan that exceeded the maximal permissible payment given firm characteristics presented in the loan application, the amount by which a loan received exceeded the maximal permissible payment, and the receipt of a loan by a firm that was ineligible for the program due to its date of registration. For all three measures, we find an economically meaningful and statistically significant reduction in irregular loans attributable to the advance screening requirement.

Authors

• Shan Aman-Rana, University of Virginia

• Daniel W. Gingerich, University of Virginia

• Sandip Sukhtankar, University of Virginia