This paper analyzes the effect of medical care on the stock of health capital by estimating
the health investment production function. An ordered probit model for the stock of health with
instrumental variables is estimated using the Two-Stage Residual Inclusion method. We argue
that risk tolerance and the opportunity cost of time are suitable instruments for the change in
medical care consumption. In contrast to majority of the empirical work, which does not
uncover that medical care has a positive effect on the stock of health, the results suggest that
physician visits significantly increases the probability of excellent health (or decreases the
probability of poor health), in accordance with Grossman’s (1972a) demand for health capital
model.Publisher's Versio
