Comparing maximum likelihood and PLS estimates for structural equation modeling with formative blocks

A common misunderstanding found in the literature is that only PLS-PM allows the estimation of SEM including formative blocks. However, if certain model specification conditions are satisfied the model is identified, and it is possible to estimate a covariance-based SEM with formative blocks. Due to the complexity of both SEM estimation methods, we studied their relative performance in the framework of the same simulation design. The simulation results showed that the effect of measurement model misspecification is much larger on the ML-SEM parameter estimates. For a model that includes a correctly specified formative block, we found that the inter-correlation level among formative MVs and the magnitude of the variance of the disturbance in the formative block have evident effects on the bias and the variability of the estimates. For high inter-correlation levels among formative MVs, PLS-PM outperforms ML-SEM, regardless of the magnitude of the disturbance variance. For a low inter-correlation level among formative MVs the performance of the two methods depends also on the magnitude of the disturbance variance. For a small disturbance variance, PLS-PM performs slightly better compared to ML-SEM. On the contrary, as the disturbance variance increases ML-SEM outperforms PLS-PM.