Does bargaining matter in the small firms matching model?

Summary 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.