Simultaneous estimation of indirect and interaction effects using structural equation models

Interaction effects are usually modeled by means of moderated regression analysis. Structural equation models wit h non-linear constraints make it possible to estimate interaction effects wh ile correcting for measurement error. From the various specifications, Joreskog and Yang's (1996, 1998), likely the most parsimonious, has bee n chosen and further simplified. Up to now, only direct effects have bee n specified, thus wasting much of the capability of the structural equation a pproach. This paper presents and discusses an extension of Joreskog and Yang's specification that can handle direct, indirect and interaction ef fects simultaneously. The model is illustrated by a study of the effects of a n interactive style of use of budgets on both company innovation and performance.

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