Mostly Harmless Econometrics: An Empiricist’s Companion

Heterogeneity and Nonlinearity

As we saw in the previous section, a linear causal model in combination with the CIA leads to a linear CEF with a causal interpretation. Assuming the CEF is linear, the population regression is it. In practice, however, the assumption of a linear CEF is not really necessary for a causal interpretation of regression. For one thing, as discussed in Section 3.1.2, we can think of the regression of Y; on X; and S; as providing the best linear approximation to the underlying CEF, regardless of its shape. Therefore, if the CEF is causal, the fact that regression approximates it gives regression coefficients a causal flavor. This claim is a little vague, however, and the nature of the link between regression and the CEF is worth exploring further. This exploration leads us to an understanding of regression as a computationally attractive matching estimator.