Does Collective Wage Bargaining Restore Efficiency in a Search Model with Large Firms?

Existing search and bargaining models show that firms hire an inefficiently large number of workers. We ask whether decentralised collective wage bargaining may result in a second-best allocation. Collective bargaining restores efficiency when the bargained wage is independent of employment; conditions that we characterise. Firms then behave as if collective bargaining was over both wages and employment, thus linking the large-firm search and bargaining environment to the efficient bargaining model (McDonald and Solow, 1981). Under more realistic conditions, workers can bargain for a share of output, so that the wage is then a function of employment. In equilibrium, firms are too large and firm entry is inefficient.