structural equation modeling
simultaneously using SEM, and it is straightfor-
Hans Baumgartner
INTRODUCTION
Structural equation modeling (SEM) with
latent variables, also known as latent variable
path analysis, is a technique for investigating
relationships between latent (unobserved)
variables or constructs that are measured
by multiple manifest (observed) variables
or indicators. Special cases are CONFIRMA-
TORY FACTOR ANALYSIS (see EXPLORATORY
FACTOR ANALYSIS), in which no directional
relationships between latent variables (factors)
are specified, and manifest variable path
analysis, in which directional relationships
between observed variables are modeled. As
an illustration, consider the model shown in
Figure 1. This model is an attempt to explain
consumers’ usage of coupons for grocery
shopping via a number of antecedent constructs.
According to the model, actual coupon usage
is a function of consumers’ intentions to
use coupons, which in turn depend on their
attitudes toward using coupons. Attitudes are
influenced by three types of beliefs about
the consequences of using coupons: rewards
(positive consequences associated with coupon
usage such as saving money on the grocery
bill); inconveniences (one type of negative
consequence associated with coupon usage such
as the time and effort required to use coupons);
and encumbrances (another type of negative
consequence associated with coupon usage such
as the need to buy nonpreferred brands in order
to take advantage of coupon offers).
This simple model illustrates two of the
major advantages of SEM. First, SEM makes
it possible to study complex patterns of rela-
tionships among the constructs in one’s model
in an integrative fashion. If regression anal-
ysis (see MULTIPLE REGRESSION) were used
to analyze the model in Figure 1, one would
have to estimate three different regressions, and
it would be quite cumbersome to show that
attitudes and intentions mediate the effects of
beliefs on coupon usage (i.e., that there are
no direct effects of beliefs on intentions and
coupon usage). In contrast, all relationships
Wiley International Encyclopedia of Marketing, edited by Jagdish N. Sheth and Naresh K. Malhotra.
Copyright © 2010 John Wiley & Sons Ltd
among model constructs can be investigated
ward to examine different forms of mediation in
complex multistage models. Furthermore, tests
of overall model fit are available, which indicate
how well the specified model represents the data.
Second, constructs such as beliefs, attitudes,
and intentions are not directly observable. Using
single-item measures to assess the constructs
of interest (e.g., asking people whether their
attitude toward using coupons is favorable or
unfavorable) does not do justice to even rela-
tively simple constructs such as coupon attitudes
(the situation becomes more problematic when
a construct is more abstract and when it has
many facets), and combining multiple measures
into averages is ad hoc and makes assumptions
that cannot be verified. Furthermore, observed
variables always contain error, both random
and systematic, and this measurement error
has to be taken into account in the analysis
because it can have serious distorting influ-
ences on investigations of relationships between
the constructs in the model. Although SEM is
not a panacea for these problems, it encour-
ages researchers to think more explicitly about
measurement error, enables assessment of the
quality of construct measurement (see VALIDITY
AND RELIABILITY), and facilitates the study of
structural relationships between constructs in
the presence of measurement error.
In this article, we provide an overview of
SEM. The presentation is organized around the
steps involved in using SEM for theory testing:
model specification; preliminary data analysis;
model estimation; overall model evaluation;
model modification; and model interpretation
(Bagozzi and Baumgartner, 1994; Baumgartner
and Homburg, 1996). The article concludes
with a brief discussion of more advanced uses of
SEM and recent developments.
MODEL SPECIFICATION
Graphical model specification. Models can be
specified graphically or algebraically, but we
focus on graphical specification, because many
researchers find it more revealing. Figure 2
shows the graphical specification of a particular
version of the model in Figure 1, assuming that
two indicators each are available to measure
2 structural equation modeling
Rewards
x1
Inconveniences Attitudes
x2 h1
Encumbrances
x3
Figure 1 Theoretical model of the antecedents of coupon usage.
rewards, inconveniences, and intentions, three
indicators to assess encumbrances, and four
indicators to capture attitudes. Coupon usage,
although shown as a latent variable, is actually
treated as an observed variable. Latent variables
that are of theoretical interest are shown as
ellipses (or sometimes as circles). Attitudes,
intentions, and coupon usage are referred to
as endogenous latent variables (denoted by the
Greek symbol η) because the model is designed
to explain the variation in these variables.
Rewards, inconveniences, and encumbrances
are called exogenous latent variables (denoted
by ξ ) because they are not explained within
the context of the model. The exogenous
latent variables are usually allowed to covary
freely, and these covariances are shown as
double-headed arrows (denoted by ϕ ij ). The
relationships of primary theoretical interest
are the effects of the exogenous variables on
the endogenous variables (denoted by γ ) and
the effects of the endogenous variables on each
other (denoted by β). For example, γ 11 refers
to the effect of rewards on attitudes, and β 21 to
the effect of attitudes on intentions. Associated
with each endogenous latent variable is an error
term (error in equation or equation disturbance,
denoted by ζ ), because it cannot be expected
that the antecedents of the latent variable can
explain it completely. Arrows that emanate from
and point to the same variable are variances, and
the variances of the ξ ’s and ζ ’s are called ϕ ii
and ψ ii , respectively (the ζ ’s are assumed to be
uncorrelated in the present case, although that is
Intentions Coupon usage
h2 h3
not always necessary). The relationships among
the exogenous and endogenous latent variables
shown as ellipses constitute the so-called latent
variable model (sometimes called the structural
model), which represents the theoretical model
studied in the research.
To examine the theoretical model empirically,
each latent variable of interest has to have at
least one observed measure. The indicators of
the exogenous (endogenous) variables are called
x (y), and by convention they are enclosed in
rectangles (or squares). The coefficients relating
the observed variables to their underlying latent
variables (so-called factor loadings) are denoted
by λx and λy . The error terms (errors in variables,
unique factors) associated with the x’s and y’s are
called δ and ε, respectively, and their variances
are denoted by θ δ and θ ε . In the present case,
the error terms were specified to be uncorrelated,
but this assumption can be relaxed. The model
linking the exogenous and endogenous latent
variables to their observed measures is called the
measurement model.
The model in Figure 2 is a complete specifica-
tion of the structural equation model of interest,
assuming that all relationships between vari-
ables are linear. The model contains five types
of parameters: the factor loadings (λx and λy );
the measurement error (unique factor) variances
(θ δ and θ ε ); the variances and covariances of
the exogenous latent variables (ϕ); the latent
variable model coefficients (γ and β); and the
(co)variances of the errors in equations (ψ).
 j11
d x1
q11 d1 1
x1
y11 y22 y33
d x2 x
q22 d2 l21 g11
z1 z2 z3
j21
j22
d x3
q33 d3 1
g12 b21 b32
j31 x2 h1 h2 h3

x
d x4 l42 y
q44 d4 l41 y
1 l62 1
j32 1 y y
l21 l31
d
g13 y5 y6 y7
q55 d5 x5 1
x y1 y2 y3 y4
l63
d x6 x3
q66 d6 e5 e6

d x e1 e2 e3 e4
q77 d7 x7 l73 e e
q55 q66
j33
e e e e
q11 q22 q33 q44

Figure 2 A structural equation model of coupon usage.

structural equation modeling 3
4 structural equation modeling
Model identification. For the model to be mean-
ingful, it has to be identified. This means that
all parameters in the model are uniquely deter-
mined so that the conclusions derived from the
analysis are not arbitrary. As a first step, the
scale of the latent variables has to be fixed (since
the scale in which they are measured cannot be
observed directly). One way to do this is to set
one loading per latent variable to 1, as shown in
Figure 2. In addition, the coefficients relating the
error terms (both measurement errors and errors
in equations) to observed or latent variables are
set to 1 (not shown explicitly in Figure 2 because
it is always done by convention). Furthermore,
if there is only a single indicator, as in the case
of coupon usage, measurement error is usually
ignored and the error (unique) variance is set
to 0 (another possibility is to assume a certain
amount of error variance, preferably based on
prior research).
A necessary requirement for identification
is that the number of parameters to be esti-
mated should not be greater than the number
of unique variances and covariances among the
observed variables. For the model in Figure 2, 35
parameters have to be estimated, and there are
105 unique elements in the observed covariance
matrix. Therefore, the model has 70 degrees of
freedom and the necessary condition for identi-
fication is satisfied (since the number of degrees
of freedom is nonnegative).
Unfortunately, this simple rule does not
guarantee identification. For certain types of
models, it is easy to check identification (see
Bollen (1989), for an extended discussion), but
in general identification is a nontrivial issue. For
general structural equation models consisting of
both measurement and latent variable models
the so-called two-step rule (which is sufficient
but not necessary) is often applied. In the first
step, the researcher tries to ascertain that a
measurement model in which no restrictions on
the latent variable model are imposed and all
covariances between (exogenous, endogenous)
latent variables are freely estimated is identified.
If there are at least two indicators per construct,
each indicator loads on one and only one
construct, the measurement error terms are
uncorrelated, and the constructs are allowed
to freely correlate, the measurement model
is identified. Even if a construct is measured
by a single indicator, as long as the error
variance is fixed to a certain value (usually
0, in which case the latent variable is really
an observed variable), the model is identified.
Using these guidelines, the measurement model
corresponding to Figure 2 is identified (with 63
degrees of freedom).
Once the model in the first step is shown to be
identified, the exogenous and endogenous latent
variables can be treated as observed and the task
in the second step is to show that the latent vari-
able model is identified. If the model is recursive
(i.e., the matrix containing the β coefficients is
subdiagonal, which means there are no reciprocal
paths or feedback loops so that latent variables
later in the sequence do not influence latent vari-
ables earlier in the sequence, and the errors in
equations are uncorrelated), the latent variable
model is identified. It can be checked that the
model in Figure 2 is recursive and therefore
identified. If the model is nonrecursive, other
rules, such as the rank rule sometimes used to
identify systems of simultaneous equations, can
be employed.
At times, it is too difficult to show identifi-
cation explicitly and in that case one may have
to rely on the computer program used to flag
a nonidentified model. A useful strategy is to
start with a simpler model that is known to be
identified and to then complicate it by intro-
ducing, one by one, the additional parameters to
arrive at the desired specification, provided the
modification indices associated with the added
parameters are nonzero (see the discussion of
model modification later in the chapter).
Measurement model specification issues. In
Figure 2, it is assumed that the observed
variables are functions (or manifestations) of
the latent variables. This is called a reflective
measurement model specification. If an indicator is
specified as reflective (i.e., as an effect indicator),
one assumes that the different indicators of a
construct are interchangeable, correlated with
each other, and contaminated by measurement
error. It is not always meaningful to regard
indicators as manifestations of an underlying
latent variable. Sometimes, it is more appro-
priate to conceptualize a given set of indicators
as defining characteristics of a construct, in
which case the latent variable depends on its

indicators. This is called a formative measurement
model specification. Formative indicators (also
called cause indicators) are not interchangeable,
need not be correlated, and are usually assumed
to contain no measurement error. Since
statistical means of trying to distinguish between
reflective and formative measurement models
are of limited usefulness, the decision whether
indicators should be modeled as reflective or
formative has to be made based on a conceptual
analysis of the items in question. The issue is
important because research shows that incorrect
specification of the measurement model can
lead to significant bias in model parameters
(see Diamantopoulos, Riefler, and Roth (2008),
for a recent review and additional references).
Although indicators should not be specified as
reflective when they are not (e.g., satisfaction
with different aspects of a job as measures of
overall job satisfaction), there are many unre-
solved issues in formative measurement models,
which makes their routine use problematic.
Another issue that has to be considered care-
fully is how many indicators of each latent
variable should be included in the model and
how these indicators should be related to the
latent variable. In general, it is better to have
more rather than fewer indicators per construct,
but there are practical constraints on how many
items can be put in a questionnaire. Further-
more, including too many individual indicators
in a model might make the model too complex,
and it is also difficult to get acceptable overall
model fits when there are too many indicators per
construct. An alternative is to use item parcels,
where subsets of individual items are averaged
and then used as (multiple) indicators in the
model. This is acceptable if the items that are
combined are known to be unidimensional (i.e.,
form a homogenous set), or if items measuring
the same facet of a multidimensional construct
are combined. If the factor structure of a set of
measures is poorly understood, parceling is not
a good idea (see Bandalos and Finney (2001), for
additional discussion of item parceling).
Latent variable model specification issues. It is
generally much more informative to propose
alternative latent variable models that, based on
prior research or new theorizing, could be plau-
sible representations of the relationships among
structural equation modeling 5
the constructs of interest than to present a single
structural model that supposedly best represents
the data. In other words, it is desirable that
researchers adopt a model comparison approach
to SEM (see MacKenzie, Lutz and Belch (1986),
for a good example). Furthermore, researchers
have to keep in mind that different specifications
that can have very different substantive implica-
tions may fit the data equally or nearly equally
well (MacCallum et al., 1993).
Sample size. Researchers should make sure
prior to data collection that the sample size will
be adequate to avoid estimation problems and
to get reliable fit statistics, parameter estimates,
and estimates of standard errors. Although many
kinds of factors can be expected to influence the
required sample size, two kinds of heuristics for
sample size determination have been proposed in
the literature. Absolute guidelines are based on
the notion that the sample size should be greater
than a certain minimum number (e.g., there
should be at least 200 observations). Relative
guidelines specify that the number of obser-
vations per parameter estimated should exceed
a certain minimum (e.g., ratios of 5 : 1 to as
high as 20 : 1 have been mentioned). If suffi-
cient prior knowledge is available, sample size
determination can be based on desired levels
of power (MacCallum, Browne, and Sugawara,
1996; see also STATISTICAL APPROACHES TO
DETERMINING SAMPLE SIZES).
PRELIMINARY DATA ANALYSIS
One common mistake in applications of SEM
seems to be that researchers fail to carefully
examine their raw data before calculating the
sample covariance matrix on which subsequent
analyses are usually based. Space constraints
prohibit a detailed discussion of the issues
involved (Hair et al., 2006), but researchers
should ensure that the data have been coded
appropriately, that missing values are dealt with
using modern methods such as full information
maximum likelihood or Bayesian multiple
imputation, that outliers do not distort the
sample covariances, and that the necessary
distributional assumptions (e.g., multivariate
normality) are adequately satisfied.
For the purpose of illustration, we use a
dataset collected from 262 female staff members
6 structural equation modeling
at two American universities to study the model
shown in Figure 2 (see Bagozzi, Baumgartner,
and Yi, 1992, for additional information).
Respondents completed a questionnaire mea-
suring beliefs, attitudes, and intentions about
using coupons for grocery shopping during
the upcoming week (on the basis of 7-point
scales, except for the second intention item,
which was measured on a 11-point scale but
linearly transformed to a range of 1–7), and one
week later indicated how many coupons from
6 different sources in 21 product categories
(plus an ‘‘other’’ category) they had used during
the previous week. For simplicity, respondents
with missing values were eliminated, leaving an
effective sample size of 250, which, combined
with a ratio of data points per parameter
estimated of about 7, seemed adequate. Not
surprisingly, coupon usage was strongly skewed
to the right, so a square root transformation
was used to normalize the data. Although the
data are not multivariate normal (the data are
discrete, the univariate skewnesses ranged from
−1.35 to 0.83, the univariate kurtoses from
−1.43 to 1.91, the relative multivariate kurtosis
was 1.17, and tests of univariate and multivariate
normality suggested rejection of normality), it
appears that the assumption is not too seriously
violated. Robustness checks are reported later.
MODEL ESTIMATION
The goal of estimation is to find values for the
five types of unknown parameters, based on the
observed covariance matrix, such that the covari-
ance matrix implied by the estimated model
parameters is as close as possible to the sample
covariance matrix. Model estimation also yields
various goodness-of-fit statistics and standard
errors for all parameters. A variety of estima-
tion procedures have been proposed, but by far
the most frequently used method is maximum
likelihood assuming that the data have a multi-
variate normal distribution. Simulations show
that the estimates tend to be robust to viola-
tions of normality, but the chi-square test of
overall model fit and the estimates of the standard
errors may not be. Estimation procedures that do
not require multivariate normality are available,
but adjustments to the normal-theory-based
methods, which are easy to use, seem to work
well in practice (see Bentler and Dudgeon 1996,
for more details).
Potential estimation problems are nonconver-
gence (a solution cannot be found within a given
number of iterations or within a given time limit)
and improper solutions (the values of sample
estimates are not possible in the population,
such as negative variance estimates). Common
causes are poorly specified models, small sample
sizes, and few indicators per factor.
There were no estimation problems with the
present data set and LISREL 8.80 converged
to a proper solution in less than one second
(using a normal-theory-based fitting function).
Ideally, more than two indicators should be
available for all of the constructs, but this was
not possible in the present case. Fortunately,
the small number of indicators did not result in
estimation problems.
OVERALL MODEL EVALUATION
Before the estimated model is interpreted in
detail, researchers should ascertain that the spec-
ification is reasonably consistent with the data.
If there are serious misspecifications and they
are not attended to, the conclusions derived
from the model can be seriously misleading. Of
course, not all model misspecifications can be
detected based on global goodness-of-fit indices,
because alternative specifications that may have
very different substantive interpretations can be
equally consistent with the data (MacCallum
et al., 1993). However, if the fit of the model is
found to be deficient, it has to be dealt with.
Global fit assessment is based on a summary
measure of the discrepancy between the sample
and model-implied covariance matrices. Theo-
retically, the fit of the model can be assessed using
a statistic T which, under appropriate assump-
tions, has a central chi-square distribution under
the null hypothesis that the specified model fits
perfectly in the population. Depending on the
particular assumptions made, there are different
T statistics, but ideally they will lead to similar
results. On the basis of the likelihood ratio
criterion, one compares the likelihood of the
hypothesized model to the likelihood of a model
with perfect fit (the saturated model) and hopes
that T will not be significantly greater than the

number of overidentifying restrictions (i.e., the
degrees of freedom of the model).
Unfortunately, there are practical problems
with the chi-square test of overall model fit.
First, there is evidence that the test is not robust
to violations of assumptions such as multi-
variate normality, although promising correc-
tions to the traditional chi-square test, such as
the Satorra–Bentler scaled (robust) test statistic,
have been proposed in the literature. Second,
the test is based on the accept-support logic,
meaning that failure to reject the null hypothesis
provides support for the researcher’s model. On
the one hand, this implies that a model is more
likely to be supported when sample size and
power are low, even though the chi-square test
is only asymptotically valid. On the other hand,
since most models are unlikely to be literally
true in the population, larger sample sizes will
ultimately lead to the rejection of a model even
when the misspecification is relatively minor.
Because of these problems, many alterna-
tive (mostly descriptive) fit indices have been
suggested. They can be classified on the basis of
(i) whether they are goodness- or badness-of-fit
indices (depending on whether an increase or
decrease in the index signals a better fit), (ii)
whether they adjudge fit in an absolute or
relative sense (stand-alone vs. incremental fit
indices, where the model of complete inde-
pendence of all observed variables is generally
used as the baseline model for the incremental
indices), (iii) whether they are normed, approx-
imately normed, or nonnormed (i.e., always or
usually constrained to fall within a 0–1 interval
in sample data, or unconstrained), and (iv)
whether or not the fit index imposes a penalty
for fitting additional parameters (correction for
model parsimony or not). A detailed discus-
sion is beyond the scope of this article. Some
researchers question the value of even those
indices which have traditionally been recom-
mended in the literature (including the cutoff
values associated with their use; see the recent
exchange in the May 2007 issue of Personality
and Individual Differences), but there is some
consensus that a few indices based on different
conceptual rationales should be used to assess
overall model fit, and we briefly mention some
of the more promising indices.
structural equation modeling 7
An intuitively appealing index is the standard-
ized root mean square residual (SRMR), which
summarizes the average size of the standardized
residuals. It is a stand-alone badness-of-fit index,
normed to fall between 0 and 1, and does not
take into account model parsimony. Values up
to 0.05 or maybe 0.10 are often considered to
reflect satisfactory fit.
Another index is the root mean square error
of approximation (RMSEA), which estimates
how well the fitted model approximates the
population covariance matrix per degree of
freedom, using the noncentrality parameter to
index

error of approximation. It is computed
as (T − df )/((N − 1)df ), where T is the
test statistic, df the degrees of freedom of the
model, and N the sample size. A confidence
interval for RMSEA is available, which provides
information about the precision of the point
estimate. RMSEA is a nonnormed, stand-alone
badness-of-fit index which imposes a penalty
for fitting additional parameters. Models with
RMSEA values below 0.05 are assumed to have
close fit, and values up to 0.08 or maybe 0.10 are
considered acceptable.
The comparative fit index (CFI) is a normed,
incremental goodness-of-fit index without a
correction for model parsimony. It is also
based on the idea of noncentrality and can be
max[(Tt −dft ), 0]
computed as 1 − max[(T b −dfb ), (Tt −dft ), 0]
, where
the subscripts refer to the target and baseline
models, respectively. CFI should be at least
0.9 and maybe 0.95 or higher for a well-fitting
model.
Finally, the nonnormed fit index (NNFI,
the extension of the original Tucker–Lewis
index in exploratory factor analysis to SEM)
is an approximately normed incremental
goodness-of-fit index which penalizes models

containing more parameters.  It is given
(Tt −dft )/((N−1)dft )
by 1 − (Tb −dfb )/((N−1)dfb ) ; the recommended
levels are the same as for CFI.
A special class of fit indices are those based
on information theory, such as the Akaike infor-
mation criterion (AIC). They can be used to
compare (even non-nested) models and take into
account model parsimony. The model with the
smallest value of the fit index (which with some
definitions may be negative) is selected.
8 structural equation modeling
One common problem often observed in
the application of many of these fit indices is
that, after having to conclude that the specified
model does not fit based on the chi-square
test, researchers marshal evidence based on
some alternative fit indices that the model is a
good enough approximation. The goal seems
to be to justify the initially proposed structure
rather than to learn something new from the
data. Furthermore, it is often unclear how
much the original model was modified to bring
the implied covariance matrix into reasonable
congruence with the sample covariance matrix,
in which case the overall model evaluation may
not be trustworthy because of the dangers of
capitalization on chance.
The fit statistics for the illustrative model
are as follows. The T statistic based on
normal-theory weighted least squares (the
minimum of the normal-theory fitting function)
was 92.60 (93.63) at 70 degrees of freedom,
yielding a p-value of 0.04 (0.03). Thus, the
fit based on the conventional chi-square test
is borderline at an α-level of 0.05. When
the normal-theory-based T was corrected for
nonnormality using the Satorra–Bentler scaled
test statistic, the resulting value was 83.57
(p = 0.13). The SRMR was 0.05, RMSEA 0.036
(with a confidence interval ranging from 0.0096
to 0.054), and both the CFI and NNFI were
0.99. All these indices suggest a very good fit
of the model. This is somewhat unusual, but
there are several reasons for this result. The
model underlying Figure 1 is well established,
the assumed belief structure is based on prior
research, and the measurement of the remaining
constructs is standard. Even when the model
seems to fit well, it is advisable to inspect the
results in greater detail to evaluate whether
modifications are warranted, as described next.
MODEL MODIFICATION
Model modifications are usually motivated by
mediocre overall fits of the initially specified
model. Two primary tools are used for
this purpose: modification indices (Lagrange
multiplier tests) and residuals (the differences
between the sample and implied covariance
matrices). A modification index is reported
for each fixed or constrained parameter and
it estimates the predicted decrease in the
T statistic when a fixed parameter is freely
estimated or an equality constraint is relaxed.
Associated with each modification index is an
expected parameter change (in original and
various standardized scale units), which shows
the predicted value of the freely estimated
parameter. Assuming a chi-square distribution
for T, a modification index exceeding 3.84
suggests a significant improvement of the model
and a significant parameter estimate when the
parameter in question is freely estimated (at an
α-level of 0.05).
Residuals show the elements in the observed
covariance matrix that are over- or underfitted,
and this may also alert the researcher to compo-
nents of the model that require attention. The
raw residuals depend on the scale in which
the variables are measured and sampling fluctu-
ations, apart from possible model misspecifica-
tion, but dividing each residual by the square root
of the estimated asymptotic variance corrects
for these confounds. These so-called ‘‘standard-
ized’’ residuals (not to be confused with the
standardized residuals on which SRMR is based)
can be interpreted as z-values and indicate which
residuals are larger than expected.
Although modification indices and residuals
can be very useful, there are two potential
dangers. First, if model modifications are
primarily driven by the goal to improve the
fit of the model (i.e., additional parameters
are added based on the size of the associated
modification indices), models that are hard to
interpret substantively or theoretically may
result. Furthermore, research has shown that
data-based model modifications are not always
able to recover the ‘‘true’’ underlying structure,
and often the values of different modification
indices are of similar magnitude, making it
difficult to decide which parameter to free.
It is therefore crucial that data-based model
modifications be tempered by knowledge of the
substantive area and theoretical considerations.
Second, data-based model modifications may
overemphasize idiosyncrasies of the particular
data set and therefore might not hold up in
future studies (the problem of capitalization on
chance). Ideally, data-based model modifications
should be reevaluated via more confirmatory
follow-up research, or a cross-validation strategy

should be used in which the full data set is split
into calibration and validation samples and the
generalizability of modifications introduced in
the former is examined in the latter.
Some authors (Anderson and Gerbing, 1988)
believe that structural equation models should
be evaluated in a two-step process (as many
as four steps have been proposed), where in
the first step no restrictions are imposed on
the latent variable model (i.e., all covariances
among the latent variables of substantive interest
are freely estimated) and attention is focused
on assessing the adequacy of the measurement
model (e.g., whether indicators load on the
‘‘right’’ constructs, nontarget loadings are small
and nonsignificant, the items individually and as
sets are sufficiently reliable, and the constructs
are discriminant). In the second step, the more
constrained structural specification of interest is
imposed on the latent variable model and the
target model is compared to alternative speci-
fications that are either more or less restrictive
than the target model (the endpoints being the
null and saturated latent variable models). If
this detailed evaluation of the measurement and
latent variable models reveals serious problems,
appropriate model modifications to either model
will be required (see Anderson and Gerbing
(1988), for details).
For simplicity, we did not conduct separate
analyses for the measurement and structural
models in our illustrative example (the measure-
ment model corresponding to Figure 2 had a T
statistic based on normal-theory weighted least
squares of 62.90 with 63 degrees of freedom).
For the model in Figure 2 (which, as can be
recalled, had a T statistic of 92.60 with 70
degrees of freedom), there were 11 significant
modification indices (out of 131) and 9 significant
standardized residuals (out of 105). The largest
modification index (12.67) suggested a direct
path from rewards to behavior, not mediated by
attitudes and intentions. This was also supported
by significant positive residuals from the two
reward indicators to coupon usage (i.e., the initial
model does not fully account for the observed
covariance between the two reward indicators
and coupon usage). When the path in ques-
tion was freely estimated (γ 31 = 0.30, z-value
of 3.6), the T statistic based on normal-theory
weighted least squares was 79.21 (p = 0.19). Most
structural equation modeling 9
parameter estimates and z-values in the revised
model were very close to those in the initial
solution, except that the magnitude of the coef-
ficient from intentions to behavior decreased
from 0.49 to 0.41. The variance accounted for
in coupon usage increased from 0.34 to 0.37 in
the revised model. There were still 10 signifi-
cant modification indices and several significant
negative residuals in the revised model, but
the suggested changes were hard to interpret.
Therefore, no additional model modifications
were considered. Ideally, the added path from
rewards to coupon usage should be validated in
subsequent research, but since there is evidence
from at least one prior study that rewards can
influence behavior directly, there is precedence
for this modification.
MODEL INTERPRETATION
A detailed evaluation of the measurement model
should involve information about the estimated
factor loadings and measurement error (unique)
variances (including the variability of the esti-
mates and T-values), evidence about measure-
ment reliability (both for individual items and all
indicators of a given construct combined), and
some indication that the constructs in the model
have discriminant validity (see also VALIDITY
AND RELIABILITY). Individual-item reliability
is simply the squared correlation between a
construct ξ j and an indicator xi . It can be
computed as ρ ii = λij 2 var(ξ j )/[λij 2 var(ξ j ) +
θ ii ]. It would be desirable if at least half of the
variance of an observed variable were substan-
tive variance rather than measurement error
(unique variance), but this is often not the case.
Two summary measures of reliability for all
indicators of a construct are in common use.
Composite reliability is the squared correla-
tion between a construct and an unweighted
sum of its indicators.
It can be obtained as ρ c
= ( λij )2 var(ξ j )/[( λij )2 var(ξ j ) + θ ii ].
Average variance extracted (AVE) is the propor-
tion of the total variance in all indicators of a
construct accounted for by the construct, and it
is calculated as the average of the individual-item
reliabilities. Composite reliability is a generaliza-
tion of coefficient alpha and therefore the same
guidelines apply. Values below 0.6 indicate poor
10 structural equation modeling
reliability and above 0.8 are desirable. For AVE,
values greater than 0.5 are deemed satisfactory.
Discriminant validity is commonly assessed
in the following two ways. First, the correlation
between two constructs should be significantly
different from unity. This can be tested by
constructing a confidence interval around the
estimated correlation and checking whether the
interval excludes 1. A more stringent test is
based on AVE. Specifically, the AVE of the
two constructs involved in a correlation should
be greater than the squared correlation. This is
based on the intuitive notion that a construct
should have more in common with its own indi-
cators than with other constructs.
In the illustrative example, all freely esti-
mated loadings were highly significant, the
individual-item reliabilities were mostly 0.5 or
higher (the two exceptions were the second
indicator of rewards with a reliability of 0.48
and the first indicator of encumbrances with
a reliability of 0.24). In future research, the
latter indicator should probably be modified.
The composite reliabilities and AVEs were
0.76 and 0.61 for rewards; 0.88 and 0.78 for
inconveniences; 0.70 and 0.44 for encum-
brances; 0.88 and 0.65 for attitudes; and 0.92
and 0.85 for intentions. With the possible
exception of encumbrances, all constructs seem
to have been measured adequately. The largest
(disattenuated) correlation is between attitudes
and intentions (0.69) and discriminant validity
is satisfied, based on both the criteria.
The latent variable model is what researchers
will generally be most interested in. The sign,
magnitude, and significance of the relationships
Table 1 Summary information for the latent variable model.
Path Parameter
Rewards → attitudes γ 11
Inconveniences → attitudes γ 12
Encumbrances → attitudes γ 13
Rewards → coupon usage γ 31
Attitudes → intentions β 21
Intentions → coupon usage β 32
R2 (attitudes) — 0.42
R2 (intentions) — 0.48
R2 (behavior) — 0.37
between the constructs test the hypotheses that
the research was designed to investigate. In
addition, researchers should report the variance
accounted for in each of the endogenous variables
so that readers can get an impression of the size of
the effects (given that the estimated coefficients
often do not have a natural interpretation).
Summary information about the latent vari-
able model in the illustrative example is shown
in Table 1. Reward beliefs have a positive
influence on attitudes and inconvenience beliefs
affect attitudes negatively. Encumbrance beliefs
do not have a significant effect on attitudes.
More favorable attitudes lead to higher inten-
tions, and more positive intentions encourage
greater coupon usage. In addition to the indirect
effect of reward beliefs on behavior via attitudes
and intentions (point estimate of 0.20, with a
standard error of 0.04), there is also a direct effect
(point estimate of 0.30, with a standard error of
0.08). Thus, the total effect of 0.50 is composed
of a direct effect (61% of the total effect) and an
indirect effect (39%). In other words, attitudes
and intentions only partially mediate the effect
of reward beliefs on coupon usage.
The final model was also analyzed using the
Satorra–Bentler robust standard errors for the
coefficients in the latent variable model and
the results were almost identical. In addition,
100 bootstrap samples were drawn and analyzed
and again the results were very similar and the
substantive conclusions remained exactly the
same.
It should be noted that any causal interpre-
tations implied in the foregoing description are
based on theoretical grounds and facilitated
Parameter Estimate Standardized z-Value
(Standard Error) Estimate
0.44 (0.08) 0.47 5.59
–0.28 (0.06) –0.38 –4.85
–0.04 (0.10) –0.03 –0.41
0.30 (0.08) 0.24 3.60
1.09 (0.11) 0.69 9.88
0.41 (0.05) 0.48 7.96
— —
— —
— —

to some extent by the design of the study
(see also CAUSAL RESEARCH; CONCEPT
OF CAUSALITY AND CONDITIONS FOR
CAUSALITY ). SEM per se does not warrant
these conclusions. For example, coupon usage
was measured one week after respondents
indicated their beliefs, attitudes, and intentions.
Although the self-report of coupon usage may
have conceivably been influenced by people’s
memory of their previous responses, it is
difficult to imagine that coupon usage (measured
at a later point) could have influenced the
other constructs in the model (measured at
an earlier point). On the other hand, beliefs,
attitudes, and intentions were all measured in
the same questionnaire and the specification
of the direction of the effects is based on one
well-established theory (the theory of reasoned
action), although one could probably adduce
other theories to justify different patterns of
effects.
OTHER USES OF SEM AND RECENT
DEVELOPMENTS
In this final section we briefly mention some
other uses of SEM and recent developments,
which cannot be dealt with fully because of space
constraints (see the edited book by Hancock and
Mueller (2006), for review chapters on many of
the topics in this section).
The models described so far are covariance
structure models that ignore the means of the
observed and latent variables. Furthermore, they
are models for a single population. It is possible
to extend the models to multiple known popu-
lations, in which case the means of the observed
and latent variables can be incorporated as well.
If latent means and path coefficients are to
be compared across different populations, it is
necessary to first establish measurement invari-
ance. Depending on the type of comparison to
be conducted, different degrees of measurement
invariance are necessary (see Steenkamp and
Baumgartner (1998), for details). For example,
the data in the illustrative application were
collected at two different universities and it
might be of interest to establish whether the
means of the different constructs or the strength
of the relationships between constructs are the
same for the two groups of respondents.
structural equation modeling 11
Traditional multigroup SEM assumes that
each observation in the sample can be assigned
to a population of interest a priori. Sometimes,
however, the researcher may believe that the
observations in a sample come from multiple
populations, but the population membership
of individual observations is not known. In
this case, latent variable mixture modeling is
applicable. The goal is to determine whether
a mixture of multiple populations gave rise to
the mean and covariance structure from which
the sample under investigation was drawn, and
to recover the separate model parameters for
each of the multiple populations as well as
estimate the mixing proportions. Such anal-
yses may be useful for market segmentation
and other investigations of unobserved hetero-
geneity (Jedidi, Jagpal, and DeSarbo, 1997; see
also UNOBSERVED HETEROGENEITY).
Structural equation models usually involve
only linear relationships (e.g., LISREL stands
for linear structural relationships). However,
sometimes it is of interest to investigate
multiplicative or quadratic relationships of
latent variables. For example, theories often
specify moderator effects of one variable on the
relationships between other variables. If such a
theory is to be tested, an interaction model has
to be specified. Although moderator hypotheses
can be tested with multigroup structural
equation models when the moderator is binary
or the number of levels of the moderator is
small, a different approach is needed when the
moderator is continuous. Several approaches
have been proposed to specify nonlinear effects
in SEM. One key advantage of these models
is that measurement error, which has even
more damaging effects when interactions and
quadratic effects are present, is taken into
account explicitly. However, these models are
also quite complex and they frequently require
assumptions that might offset their perceived
advantages.
The basic structural equation model assumes
that the data are a simple random sample
from a single underlying population. However,
complex survey designs are sometimes used,
where observations are sampled in multiple
stages (e.g., first companies are sampled, and
then salespeople within companies), the total
population is stratified (e.g., by male and female
12 structural equation modeling
salespeople), and selection probabilities are
unequal across strata (e.g., female salespeople
have a higher probability of being included in
the sample; see also SAMPLING TECHNIQUES;
PROBABILITY SAMPLING ). Multilevel SEM
and sampling weights can be used to deal with
these complications. For example, a researcher
could specify a multilevel structural equation
model and study (i) whether more motivated
salespeople in a company are more likely to
attain higher sales (within-company analysis)
and (ii) whether companies whose salespeople
are more motivated on average tend to have
higher sales (between-company analysis).
Finally, SEM can be used for longitudinal
analyses in which a researcher wants to study
the trajectory of change in some variable(s) of
interest and explain various aspects of the change
trajectory (e.g., the linear rate of change) based
on other variables, or use the change trajectory
as an antecedent variable. In such an analysis,
which is referred to as latent curve or latent
growth modeling, the latent variables indicated by
the repeated measurements (e.g., amount of cola
consumed per year over a number of years) are
individual-level curve parameters (e.g., inter-
cepts and slopes if a linear trajectory is assumed,
although other specifications are possible), which
can subsequently serve as endogenous or exoge-
nous factors in more detailed investigations of
the change process.
CONCLUSION
SEM has become a valuable addition to the
methodological toolbox of researchers in social
sciences in general and marketing in particular.
It combines a concern with measurement, which
takes into account the inherent fallibility of single
indicators of constructs, with the opportunity to
model complex patterns of relationships among
constructs. The scope of SEM is constantly
being expanded and it can be expected that SEM
will continue to flourish in empirical research in
marketing.
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