Making the rules stricter can actually make it easier for companies to hide their dirty laundry from the government.
Known as the 'Paradox of Tightening,' higher procedural burdens force companies to consolidate many small reports into fewer, larger ones to save on costs. Because regulators have limited capacity, they struggle to audit these massive, complex filings as effectively as smaller ones, leading to an overall drop in the detection of illegal activity.
Capacity Constraints, Encounter Frequency, and the Paradox of Tightening
SSRN · 6298578
I study enforcement systems that observe regulated activity through discrete administrative encounters (filings, inspections, audits) under binding screening capacity. When agents can choose how to partition a fixed activity volume across encounters, per-encounter procedural burdens induce consolidation into fewer and larger encounters. If screening resources are allocated at the encounter level and scale sublinearly with encounter scope, detectability declines with encounter size. In that case,