ON THE ECONOMICS OF THE-SOFTWARE REPLACEMENT PROBLEM

Software maintenance constitutes a significant fraction of the software budget. The cost of maintaining old applications has been escalating and this trend is likely to continue in the foreseeable future. The study of software maintenance strategies has become important to both researchers and practitioners in Information Systems. While there is a rich literature on the technical aspects of software maintenance, research on the economics of maintenance is in its infancy. In particular, the tradeoffs between maintaining and rewriting old software have not been investigated from a theoretical standpoint. In this paper, we present an economic model of the software replacement problem. Based on available empirical evidence, we hypothesize that, with frequent modifications and enhancements, the complexity of software increases rapidly. This deterioration of the code leads to a sharp increase in the maintenance cost. Thus, there may exist a time when it is optimal (in an economic sense) to rewrite the system, which reduces the system complexity and the subsequent maintenance cost. The proposed model allows us to compare the economics of various rewriting strategies and to determine the optimal rewriting point(s). Some interesting results with implications for the systems manager are obtained from the analysis. These include the impacts of system size, structuredness of the underlying technology, and the availability of superior technologies upon the rewriting point(s) and life cycle costs. A numerical example is provided to demonstrate the applicability of the model

Differential-difference equations in economics: on the numerical solution of vintage capital growth models

In this papel, we examine techniques for the analytical and numerical solution of statedependent differential-difference equations. Such equations occur in the continuous time modelling of vintage capital growth models, which form a particularly important class of models in modern economic growth theory. The theoretical treatment of non-statedependent differential-difference equations in economics has already been discussed by Benhabib and Rustichini (1991). In general, though, the state-dependence of a model prevents its analytical solution in all but the simplest of cases. We review a numerical method for solving state-dependent models, using sorne simple examples to illustrate our discussion. In addition, we analyse the Solow vintage capital growth model. We conclude by mentioning a crucial unresolved issue related to this topic

R&D Appropriability and Planned Obsolescence: Empirical Evidence from Wheat Breeding in the UK (1960-1995)

Plant breeders face a unique appropriation problem - plants are reproducible, genetic information is heritable and seeds can be multiplied. The paper uses indicators of varietal age as a proxy for durability to examine strategies of planned obsolescence. Using wheat breeding in the UK, evidence of strategies of planned obsolescence is confirmed. This is then corroborated with evidence of tendencies towards increased proliferation of varieties on the market and breeding strategies that focus on incremental productivity improvements (i.e. increased efficiency) and narrow and limited disease resistance (i.e. reduced durability).Planned Obsolescence, R&D appropriability, Innovation, Plant Breeding, Crop Production/Industries, L13, O31, Q10,

Damaged Durable Goods

A durable-goods monopolist may use quality degradation as a commitment not to lower price in the future. The introduction of damaged goods expedites low-valuation consumers’ future demands, and helps the firm to mitigate the Coasian time-consistency problem. In such a case, damaged goods are more likely to be observed relative to the static setting where only the price-discrimination aspect of quality degradation is in effect. However, it is more likely to reduce welfare by inducing low- valuation buyers to buy the low-quality good early rather than to wait and buy the high-quality good later. So, quality degradation of durable goods is more likely to occur but less promising to the society, relative to the case of non-durable goods where damaged goods are rarely observed but more likely to be Pareto-improving.Damaged Goods, Quality Degradation, Durable-Goods Monopoly, Time-Consistency

Damaged Durable Goods

A durable-goods monopolist may use quality degradation as a commitment not to lower price in the future. The introduction of damaged goods expedites low-valuation consumers' future demands, and helps the firm to mitigate the Coasian time-consistency problem. In such a case, damaged goods are more likely to be observed relative to the static setting where only the price-discrimination aspect of quality degradation is in effect. However, it is more likely to reduce welfare by inducing low-valuation buyers to buy the low-quality good early rather than to wait and buy the high-quality good later. So, quality degradation of durable goods is more likely to occur but less promising to the society, relative to the case of non-durable goods where damaged goods are rarely observed but more likely to be Pareto-improving.damaged goods, quality degradation, durable-good monopoly

Matching Methods for Causal Inference: A Review and a Look Forward

When estimating causal effects using observational data, it is desirable to replicate a randomized experiment as closely as possible by obtaining treated and control groups with similar covariate distributions. This goal can often be achieved by choosing well-matched samples of the original treated and control groups, thereby reducing bias due to the covariates. Since the 1970s, work on matching methods has examined how to best choose treated and control subjects for comparison. Matching methods are gaining popularity in fields such as economics, epidemiology, medicine and political science. However, until now the literature and related advice has been scattered across disciplines. Researchers who are interested in using matching methods---or developing methods related to matching---do not have a single place to turn to learn about past and current research. This paper provides a structure for thinking about matching methods and guidance on their use, coalescing the existing research (both old and new) and providing a summary of where the literature on matching methods is now and where it should be headed.Comment: Published in at http://dx.doi.org/10.1214/09-STS313 the Statistical Science (http://www.imstat.org/sts/) by the Institute of Mathematical Statistics (http://www.imstat.org

What drives the vacancy rate for information technology workers?

This paper provides empirical evidence on both the magnitude and determinants of unfilled positions for information technology workers using cross-sectional data on 4150 German firms. Vacancies are defined as unfilled positions excluding those created by replacement needs during the first half of the year 2000. The share of unfilled positions created by replacement needs is only about 20 percent, indicating that high turnover rates are not the main reason for high vacancy rates. The adjusted job vacancy rate for ICT workers varies between 5.7 percent in the ICT sector and 6.7 percent in the non-ICT sector. The results of a generalized tobit model show that the adjusted vacancy rate mainly depends on the firm size, the share of ICT workers and actions taken in the past to solve the ICT worker shortage but not on the diffusion of ICT. In the ICT sector, the decision made in the past to train apprentices in the new ICT occupations seems to have reduced the current vacancy rate. In the non-ICT sector, a successful strategy to solve the ICT worker shortage appears to be increased internal training. Finally, in the non-ICT sector, the common practice of completely outsourcing software programming significantly reduces the probability of unfilled positions. -- Dieser Beitrag beschäftigt sich mit der Anzahl und den Bestimmungsfaktoren unbesetzter Stellen für IKT-Fachkräfte in Deutschland. Datengrundlage ist eine repräsentative telefongestützte (CATI) Umfrage von 4150 Unternehmen für das Jahr 2000. Die Quote unbesetzter Stellen für IKT-Fachkräfte (ohne Stellen aufgrund Ersatzbedarfs) variiert zwischen 5,7 Prozent in der IKT-Branche und 6,7 Prozent in der Nicht-IKT-Branche. Der Anteil fluktuationsbedingt unbesetzter Stellen an allen unbesetzten Stellen beträgt 20 Prozent. Somit dürfte die Personalfluktuation der IKT-Fachkräfte nicht die Hauptursache für die hohe Quote unbesetzter Stellen sein. Regressionsergebnisse auf Basis verallgemeinerter tobit-Modelle zeigen, dass die Quote unbesetzter Stellen hauptsächlich von der Firmengröße, dem Anteil der IKT-Fachkräfte im Vorjahr sowie den Strategien zur Überwindung des IKTFachkräftemangels in der Vergangenheit abhängen, jedoch von der Diffusion der Informationstechnologie nicht beeinflusst werden. Hinsichtlich der Wahrscheinlichkeit unbesetzter Stellen zeigt sich, dass die Auslagerung der Software-programmierung an Fremdunternehmen zu einer geringeren Betroffenheit von unbesetzten Stellen für IKT-Fachkräfte führt.unbesetzte Stellen,IKT-Fachkräfte,Informationstechnologie,Unfilled positions,ICT workers,information technology

Operational asset replacement strategy : a real options approach

This article analyses the problem of replacement by investigating the optimal moment of investment replacement in a given tax environment with a given depreciation policy. An operation and maintenance cost minimization model, based on the definition of equivalent annual cost, is applied to a real options paradigm. The developed methodology allows for an innovative evaluation of the flexibility of replacement process analysis. A new two- factor evaluation function is introduced to quantify decisions of asset replacement under a unique cycle environment. This study improves upon previous findings in the literature as it accounts for autonomous salvage value processes. Based on partial differential equations, this model achieves a general analytical solution and particular numerical solution. The results differ significantly from those observed in one-factor models by showing evidence of over-evaluation in optimal levels of replacement, and by confirming suspicions that different types of uncertainties produce non-monotonous effects on the optimal replacement level. The scientific contribution of this study lies in new and stronger approaches to equivalent annual cost literature, supplying an algorithm for operation and maintenance cost minimization that is conditioned by autonomous salvage value. This study also contributes to the real options literature by developing of a two-factor model with Brownian processes applied to asset replacement.info:eu-repo/semantics/publishedVersio