Regulatory fragmentation drags down efficiency.

This paper reveals a hidden burden in the U.S. regulatory system: multiple federal agencies often regulate the same issue, creating what the authors call “regulatory fragmentation.” Using advanced textual analysis of the Federal Register, the study shows that fragmentation, especially when agencies don’t coordinate, leads to higher costs, lower productivity, reduced growth, and fewer market entrants. Rather than streamlining oversight, overlapping mandates between agencies create confusion, redundancy, and sometimes outright inconsistency. The result? A drag on firm performance and broader economic efficiency.

Regulatory Fragmentation

• Joseph Kalmenovitz, Michelle Lowry, and Ekaterina Volkova
• The Journal of Finance, 2025
• A version of this paper can be found here
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Key Academic Insights

Fragmentation Adds Overhead, Slows Growth

When multiple regulators govern the same topic, it’s not just redundancy—it’s confusion. Firms face more SG&A expenses, lower return on assets, and decreased total factor productivity. In fragmented regulatory environments, companies expend more effort managing compliance and less on innovation or expansion.

Coordination Matters

The study finds that when multiple agencies collaborate on rulemaking, the negative effects of fragmentation are significantly reduced. But when agencies act independently, firms are left navigating conflicting mandates – leading to worse performance outcomes.

The Regulatory Map Isn’t Flat

Using machine learning on the Federal Register, the authors map 100 regulatory topics and track which agencies are involved. Some industries, especially finance, show heavy topic concentration but high fragmentation, or many agencies involved in a narrow set of topics. In contrast, industries like healthcare spread across more topics, but face less overlapping agency oversight.

Capture Gets Harder, Not Easier

Fragmentation also undermines firms’ ability to influence policy. Lobbying falls in more fragmented contexts, suggesting that companies struggle to know which agency to target. That might be good for regulatory independence, but it increases compliance uncertainty.

Practical Applications for Investment Advisors

Regulatory Risk Isn’t Just Rules. It’s Structure

Advisors helping firms navigate compliance should pay attention to not just the volume of regulation, but how many agencies are involved. A concentrated topic governed by many agencies (e.g., banking) poses more friction than a dispersed one regulated by a single body.

Complexity Hurts the Little Guys

Smaller firms are disproportionately affected. The study finds fragmentation deters entry and accelerates small firm exits, altering industry dynamics. Advisors working with startups or small-cap clients should factor in regulatory fragmentation when assessing market viability.

ESG and Fragmentation May Collide

As ESG oversight grows, many agencies (SEC, EPA, DOL) may pile on, potentially creating a fragmented web. This research implies that ESG mandates could be particularly costly if not coordinated.

How to Explain This to Clients

“Imagine trying to comply with three different sets of rules from three bosses on the same issue—each with their own language and deadlines. That’s what regulatory fragmentation is like. It’s not just red tape—it’s multiple overlapping tapes that make it hard to move forward. This complexity impacts your investments, especially in industries like banking or energy.”

The Most Important Chart from the Paper

This histogram shows the distribution of firms’ exposure to regulatory fragmentation. Unlike the fragmentation of individual topics (Panel A) or the dispersion of topics within a firm (Panel B), the firm-level exposure is more normally distributed—indicating that fragmentation affects nearly every firm, but to varying degrees. This data-driven measure blends the number of agencies involved per topic with each firm’s exposure to those topics via their 10-K filings.

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged and do not reflect management or trading fees, and one cannot invest directly in an index.

Abstract

Regulatory fragmentation occurs when multiple federal agencies oversee a single issue. Using the full text of the Federal Register, the government’s official daily publication, we provide the first systematic evidence on the extent and costs of regulatory fragmentation. Fragmentation increases the firm’s costs while lowering its productivity, profitability, and growth. Moreover, it deters entry into an industry and increases the propensity of small firms to exit. These effects arise from redundancy and, more prominently, from inconsistencies between government agencies. Our results uncover a new source of regulatory burden, and we show that agency costs among regulators contribute to this burden.