Signal-to-Noise Ratio in Estimating and Testing the Mediation Effect: Structural Equation Modeling versus Path Analysis with Weighted Composites

Mediation analysis plays an important role in understanding causal processes in social and behavioral sciences. While path analysis with composite scores was criticized to yield biased parameter estimates when variables contain measurement errors, recent literature has pointed out that the population values of parameters of latent-variable models are determined by the subjectively assigned scales of the latent variables. Thus, conclusions in existing studies comparing structural equation modeling (SEM) and path analysis with weighted composites (PAWC) on the accuracy and precision of the estimates of the indirect effect in mediation analysis have little validity. Instead of comparing the size on estimates of the indirect effect between SEM and PAWC, this article compares parameter estimates by signal-to-noise ratio (SNR), which does not depend on the metrics of the latent variables once the anchors of the latent variables are determined. Results show that PAWC yields greater SNR than SEM in estimating and testing the indirect effect even when measurement errors exist. In particular, path analysis via factor scores almost always yields greater SNRs than SEM. Mediation analysis with equally weighted composites (EWCs) also more likely yields greater SNRs than SEM. Consequently, PAWC is statistically more efficient and more powerful than SEM in conducting mediation analysis in empirical research. The article also further studies conditions that cause SEM to have smaller SNRs, and results indicate that the advantage of PAWC becomes more obvious when there is a strong relationship between the predictor and the mediator, whereas the size of the prediction error in the mediator adversely affects the performance of the PAWC methodology. Results of a real-data example also support the conclusions.