I am wondering - aside from getting shiny new toys to mop up with, what would ever be the incentive to escalate the war?

As I understand, bigger and nicer ships will just incur more upkeep costs for me, while the AI does not care.
They are more expensive to build, but the AI does not care.
It also means planets will be more heavily fortified/garrisoned so the small free stuff can't deal with it as effectively.
A single battle worth of fighters is enough to bankrupt one, and garrisoning only with the free stuff that does not have fighters or upkeep will quickly become inefficient as stuff gets more powerful.

All in all, with the AI not bound by the same economy rules as the player, and bleeding money for anything(no matter if you cheese or not...albeit I feel the game on harder difficulty almost demands some it - may be because I'm not too experienced with it yet, though) - it seems it's in the players best interest to stick to the lowest possibly tech level until half the galaxy is theirs, THEN when everything is built up and fortified, possibly consider teching up to have some fun with new ships.

Or did I miss something?
Maybe if teching up would remove or lower the upkeep or replacement costs on the lower tier stuff, it would be worth it.
But as is, it seems that you get pushed into using higher tier stuff that the AI gets from the assembly line for free, just making things harder for yourself.
Is that the idea? That it allows you to ramp up difficulty?