Empirical evidence from the psychology literature suggests that reactions towards health shocks depend strongly on the personality trait of locus of control, which is usually unobservable to the analyst. In this paper, the role of this discrete heterogeneity in shaping the effects of health shocks on labour supply is theoretically modelled by adopting the Grossman (1972) model. Using German longitudinal data, the predictions of the theoretical model are tested with a latent class binary choice model and an alternative identification strategy.A robust result across both specifications for various definitions of locus of control, health shocks and labour market outcomes is that internals have a smaller probability of leaving the labour market after experiencing a health shock than externals.
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Paper provided by Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen in its series Ruhr Economic Papers with number
0071.
Find related papers by JEL classification: I12 - Health, Education, and Welfare - - Health - - - Health Production D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models
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