The error term in formative measurement models: interpretation and modeling implications

Purpose To clarify the nature of the error term in formative measurement models, as it had been misinterpreted in prior research. Design/methodology/approach The error term in formative measurement models is analytically contrasted with the measurement errors typically found in reflective measurement models. Findings It is demonstrated that, unlike in reflective measurement, the error term in formative models is not measurement error but rather a disturbance representing non‐modeled causes. It is also shown that, under certain circumstances, the inclusion of an error term is not necessary/appropriate. Research limitations/implications Focus is only on first‐order measurement models; higher‐order specifications are not considered. Originality/value The paper helps researchers in their initial specification of formative measurement models as well as their evaluation of the subsequent model estimates, leading to better specifications for formative constructs.