PLS-based SEM Algorithms: The Good Neighbor Assumption, Collinearity, and Nonlinearity

Abstract

The partial least squares (PLS) method has been extensively used in information systems research, particularly in the context of PLS-based structural equation modeling (SEM). Nevertheless, our understanding of PLS algorithms and their properties is still progressing. With the goal of improving that understanding, we provide a discussion on the treatment of reflective and formative latent variables in the context of three main algorithms used in PLS-based SEM analyses –PLS regression, PLS Mode A, and PLS Mode B. Two illustrative examples based on actual data are presented. It is shown that the “good neighbor” assumption underlying modes A and B has several consequences, including the following: the inner model influences the outer model in a way that increases inner model coefficients of association and collinearity levels in tandem, and makes measurement model analysis tests dependent on structural model links; instances of Simpson’s paradox tend to occur with Mode B at the latent variable level; and nonlinearity is improperly captured. In spite of these mostly detrimental outcomes, it is argued that modes A and B may have important and yet unexplored roles to play in PLS-based structural equation modeling analyses.