Net spills among NATO allies: Theory and empirical evidence from dynamic quantile connectedness

Abstract

The paper draws on the economic theory of alliances to stress the importance of considering both benefits and costs arising from the 0interaction between member states of a military alliance in terms of defence expenditure on equipment. We expand the theory of alliances to incorporate the spills that stem from the obligations of each ally by introducing the notion of spill-outs and net spills, the latter measured as the difference between spill-in and spill-out effects. To assess the net spills contribution of each of the members to the alliance, we test for empirical evidence of net spills among a group of North Atlantic Treaty Organization (NATO) allies, applying time-varying Dynamic Quantile Connectedness analysis. The results that stem from our model considering the cost of spill-outs suggest that there are strong incentives among the allies for free-riding behaviour. In line with our theoretical model, our empirical analysis shows that it is only during crisis period that NATO member-states contribute actively to the alliance, something that has become increasingly clear since the recent Russian invasion of Ukraine.

Introduction to Special Issue on Navigating NATO dynamics: Addressing various challenges in the international security environment

“…The issue of NATO effectiveness in resolving such critical situations is brought up in a paper entitled "Net spills among NATO allies: Theory and empirical evidence from dynamic quantile connectedness" by Palaios et al (2023). The paper addresses the doubts expressed in the previous paper regarding the ability of NATO to resolve critical issues using soft diplomatic power.…”