Abstract
Several studies have stressed the importance of simultaneously estimating interaction and quadratic effects in multiple regression analyses, even if theory only suggests an interaction effect should be present. Specifically, past studies suggested that failing to simultaneously include quadratic effects when testing for interaction effects could result in Type I errors, Type II errors, or misleading interactions. Research investigating this issue has been limited to multiple regression models. Contrarily, structural equation modeling is a more appropriate analysis when hypotheses include latent variables. The current study utilized Monte Carlo simulation to investigate whether quadratic effects should be included in the latent variable interaction model. Consistent with previous research, it was found that including latent variable quadratic effects in the model successfully reduced the frequency of spurious interaction effects but at a cost of low power to detect true interaction effects, inaccurate parameter estimates, inaccurate standard error estimates, and reduced convergence rates. Based on findings from the current study, we recommend that researchers hypothesizing interactions between latent variables should test for these relations using the latent variable interaction model rather than the interaction quadratic model. If researchers are concerned about spurious interactions, then they may want to consider including quadratic effects in the model, provided that they have sample sizes of at least 500 and high indicator reliability. We caution all researchers to base higher order effects models on theory.