| In structural equation models with latent variables, maximum likelihood (ML) estimation is currently the most prevailing estimation method. However, the ML method fails to provide accurate solutions in a number of situations including those involving small sample sizes, nonnormality, and model misspecification. To overcome these difficulties, regularized extensions of two-stage least squares estimation are proposed that incorporate a ridge type of regularization in the estimation of parameters. Two simulation studies and two empirical applications demonstrate that the proposed method is a promising alternative to both the maximum likelihood and non-regularized two-stage least squares estimation methods. An optimal value of the regularization parameter is found by the K-fold cross validation technique. A nonparametric bootstrap method is used to evaluate the stability of solutions. A goodness-of-fit measure is used for assessing the overall fit. |
