The Norwegian Covid-19 Compensation Scheme: To what extent was compensation distributed in line with the objective of firm viability?

Abstract

This thesis aims to examine the relationship between bankruptcy risk and received compensation. The Erna Solberg Government enacted the Norwegian compensation scheme to save otherwise viable firms during the Covid-19 pandemic. The compensation scheme was of great political importance and acquired significant public attention through the continuous spotlight of the media. While most focused on changes in bankruptcy frequency and size of compensation, we argue that the distribution within the scheme warrants further attention. In line with literature on resource allocation and forbearance lending, we identify that granting compensation to firms at risk of bankruptcy can distort market mechanisms long-term. Presumably for the same reason, a primary target of the compensation scheme was to exclude unviable firms. Despite the possibility for distribution inefficiencies, there has hardly been any effort to assess the scheme. Our response was to evaluate if compensation was granted in line with the objective of firm viability. We apply bankruptcy prediction to measure firm viability and limit the thesis to the Norwegian compensation scheme during its two first iterations in 2020. We conduct our research using two stages of methodology. Firstly, we use the random forest machine learning algorithm to estimate the likelihood of near-future bankruptcy prior to the outbreak of Covid-19. The predicted risk of bankruptcy is then used to analyze the trend in distribution of size-adjusted compensation. Our scope is limited to the hospitality industry to achieve increased resolution on within-industry differences. Our analysis reveals that predicted bankrupt firms received an estimated 54.3 million NOK in compensation. We identify a weak but statistically significant positive relationship between size-adjusted compensation and the predicted risk of bankruptcy. Our thesis concludes that compensation at the aggregate level primarily was distributed in line with the compensation scheme objective of viability. However, compensation distribution within the scheme was moderately asymmetric in that the support was proportionally greater for firms with an elevated probability of bankruptcy.