Multicollinearity and Measurement Error in Structural Equation Models: Implications for Theory Testing

The literature on structural equation models is unclear on whether and when multicollinearity may pose problems in theory testing (Type II errors). Two Monte Carlo simulation experiments show that multicollinearity can cause problems under certain conditions, specifically: (1) when multicollinearity is extreme, Type II error rates are generally unacceptably high (over 80%), (2) when multicollinearity is between 0.6 and 0.8, Type II error rates can be substantial (greater than 50% and frequently above 80%) if composite reliability is weak, explained variance (R 2 ) is low, and sample size is relatively small. However, as reliability improves (0.80 or higher), explained variance R 2 reaches 0.75, and sample…