Military spending and the fear hypothesis

This paper examines the 'fear hypothesis' as a framework for understanding determinants in military spending. The hypothesis suggests that nations increase their defense budgets in response to perceived external threats to their security. To investigate this, we employ a generative artificial intelligence approach to quantify external threats and analyze the relationship between these perceived threats and military spending. We quantify threat levels by evaluating the geographic proximity to and military expenditures of potential adversaries. Our analysis utilizes various estimation models, yielding mixed results. However, the overall findings provide compelling evidence supporting the fear hypothesis. Thus, potential threats have significantly influenced military spending over time, with this effect becoming more pronounced in recent years.