Software and Hardware in Data Processing Budgets

This paper develops a microeconomic framework for the determination of data-processing budgets over time, and, in particular, the allocation of these budgets between software and hardware. The model dynamically balances the value and cost of information services, given the prevailing cost trends. It regards software and hardware as inputs to the process of producing information services, and identifies the complementarity and substitution between them as major determinants of the efficient budget allocation. The theory provides a basis for understanding the budgeting process and for predicting future trends, and is applied to actual budget data.