Describing the Dynamics of Distributions in Search and Matching Models by Fokker-Planck Equations

The analysis of distributions is central to search and matching models. Wage distributions are a central concern but distributions of productivities, fi?rm types, human capital, entitlement to unemployment benefi?ts and wealth become increasingly important. We present a method - the Fokker-Planck equations - which allows to describe and analyse the dynamics of distributions in a very general way. We illustrate this approach by analysing optimal saving of risk-averse households in a frictional labour market. Our Fokker-Planck equations describe the evolution of the joint distribution of labour market status and wealth. A very intuitive interpretation is provided.