Subsidies and the resource constraint

Good afternoon,

I have a simple dge model where the government subsidies a part of my firm’s investments such that subsidies makes the profit equal to 0 (subsidies=investments-revenues). So I have subsidies in firm’s program and the government’s budget constraint. Note that subsidies are fixed after the cost minimisation. Investments can be larger than revenues, so profit can be negative for some years. But then the government intervene and gives that additional remuneration to the firm.

In that case, if I resolve the model by hand, subsidies to investments do not appear in the resource constraint. My issus is that the aggregate supply is the sum of gross value added. Don’t subsidies increase the gross value added normally ? I’m bothered not having subsidies in the resource constraint at the end since this is an additional revenue for the firm

Thank you!

I am not sure I understand. Subsidies are usually not a final use of goods. You transfer resources to the firm and the firm uses them for investments, which are the final use of goods. Of course, the resources for the subsidies need to have been produced somewhere.

Thank you @jpfeifer

Subsidies comes from the tax revenues of the government. So I don’t need to put subsidies on the supply and demand side of the aggregate resource constraint?

Think about subsidies as lump sum transfers. They don’t appear in the resource constraint.

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