[1985][1986][1987][1988][1989][1990][1991][1992][1993][1994][1995][1996][1997][1998][1999]. So far there is no direct estimator available for dynamic panels with strong spatial dependencies. We propose a two-step procedure, which involves first spatial filtering of the variables to remove the spatial correlation, and application of standard GMM estimators for dynamic panels in a second step. Our results show that ignorance of the spatial correlation leads to potentially misleading results. Applying a system GMM estimator on the filtered variables, we obtain a speed of convergence of 6.9 per cent and a capital elasticity of 0.43. JEL No.: C23, O00, R11

Economic growth, economic integration, European Union, panel data,

We use a panel approach, covering 10 EU Member States over the period 1981-99, for each of three major industry groups (manufacturing, construction and services) and 18 more detailed industries to test whether the EU's Single Market Programme has led to a reduction in firms' mark-ups over marginal costs. We address explicitly the uncertainty with respect to the timing of the changeover and allow for a possibly continuous regime shift in a smooth transition analysis. Where regime shifts can be found, the velocity of transition is extremely high, making the linear model a justifiable approximation. We also test for discrete structural breaks in the time window from 1986 to 1996, taking up endogeneity concerns in a generalized method of moments framework. Mark-up reductions are found for aggregate manufacturing (although it is also suggested that mark-ups increased in some manufacturing industries in the precompletion period at the end of the 1980s) and also for construction. In contrast, mark-ups have gone up in most service industries since the early 1990s, which confirms the weak state of the Single Market for services and suggests that anti-competitive defence strategies have emerged in EU service industries. Copyright Blackwell Publishing Ltd and the Department of Economics, University of Oxford 2007.

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