Structural Equation Modeling with Latent Variables and Composites

Abstract: Structural equation modeling (SEM) is a prevalent approach for studying constructs. Traditionally, these constructs are modeled as reflectively measured latent variables - common factors that account for the variance-covariance structure of their associated indicators. Over the past two decades, there has been growing interest in an alternative way of modeling constructs: the composite, i.e., a linear combination of indicators. However, existing approaches to estimating composite models either limit researchers from fully leveraging SEM's capabilities, such as handling missing data, evaluating overall model fit, and testing group differences, or significantly increase complexity of the model specification by introducing additional variables. Against this background, this paper presents SEM with latent variables and composites. Our presented model specification, along with its model-implied variance-covariance matrix, enables researchers to: (i) utilize well-established SEM estimators, including maximum likelihood and generalized least squares estimators, and (ii) fully exploit SEM's capabilities in model specification, assessment, and missing data handling. This advancement aims to enhance the flexibility and applicability of SEM in analyzing constructs.