Does bargaining matter in the small firms matching model?

In this article, we use a stylized model of the labor market to investigate the effects of three alternative and well-known bargaining solutions. We apply the Nash, the Egalitarian and the Kalai–Smorodinsky bargaining solutions in the small firm's matching model of unemployment. First, we show that the Egalitarian and the Kalai–Smorodinsky solutions are easily implementable within search-matching economies. Second, our results show that even though the traditional results of bargaining theory apply in the context of search-matching economies, they are quantitatively weaker than expected compared to the results established in the earlier literature. In addition, and excluding a model with on-the-job search, it appears that the policy implications of labor taxes and employment protection are not very sensitive to the choice of the bargaining solution.

► We question the bargaining structure of the search-matching model
► We extend the canonical model to Kalai–Smorodinsky and Egalitarian bargaining.
► Results show small differences between bargaining schemes.
► Results readily extend to the inclusion of labor market policies or on-the-job search.