Department of Economics

Klaus Desmet wins Robert E. Lucas Jr. Prize

In early 2019, Klaus Desmet, the Ruth and Kenneth Altshuler Centennial Interdisciplinary Professor, was awarded the Robert E. Lucas Jr. Prize by the Journal of Political Economy. The Journal of Political Economy, widely recognized as one of the top-5 journals in economics, awards this prize once every two years for the most interesting paper in the area of economic dynamics that is published in the Journal of Political Economy. Desmet won this award with his co-authors, Dávid Krisztián Nagy and Esteban Rossi-Hansberg for their paper titled “The Geography of Development”.

The motivation for Desmet and co-authors is that where a person lives determines to a large extent their well-being, yet people cannot freely choose where to live because of mobility costs and immigration restrictions. So, how do such restrictions affect where people live today, and more importantly, how does it shape the global economy of the future? Overall, Desmet and co-authors find that removing immigration restrictions across the world, and so allowing people to choose where they live, would triple global GDP. However, immigration restrictions and removal of these restrictions affect different parts of the world very differently.

A key tension in their model is that people want to live in places that have attractive amenities but, all else equal, firms have greater incentives to invest in new technology in more densely populated places. This tension leads to striking predictions.

If current immigrations are maintained, densely populated places across Asia and Africa would see massive technological innovation. And, this would propel them from their current middle-low income status and past today's economic powerhouses like the U.S. and the E.U.

In contrast, relaxing immigration polices today would attract people to places like the U.S. and E.U. because of the attractive amenities and current technological prowess. This would enable the U.S. and E.U. to maintain their economic pre-eminence by increasing population density and fostering continued strong incentives for technological innovation. So, the secret to the continued economic might of the U.S. is more liberal immigration policies which stands in stark contrast to today's political headwinds.

In addition to the real world quantitative implications that come from their analysis, the theoretical model developed by Desmet and co-authors makes a substantial contribution to the field of economics. Their model can be applied by future researchers to investigate how various economic policies and economic shocks impact economic development over time and across geographic locations, whether these locations are different countries or different regions within a county.