A model selection approach for multiple indicators multiple causes model

This study proposes a model selection approach for determining the inclusion or exclusion of a latent variable when two exogenous and two endogenous variables are provided. The models compared are the multivariate regression model without latent variables (MR model) and the multiple indicators multiple causes model (MIMIC model). The inclusion of a latent variable in the MR model yields the MIMIC model. In the proposed approach, an information criterion is used to select the best model of the two. The efficacy of the proposed approach is examined through two types of simulation studies and empirical analyses of the shadow economy and the fiscal illusion.