The effect of medical care on health capital

Abstract

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.