Most jurisdictions maintain strict advertising transparency laws to protect consumers, but many haven’t yet applied those regulations to social media, and new research suggests that perhaps they shouldn’t.

Such regulations are based on the theory that properly labelling ads increases transparency and trust, but requiring the disclosure of sponsored posts on social media may inadvertently have the opposite effect. According to new research, enforcing ad transparency on social media not only increases the total amount of advertising on the platform, but also the volume of undisclosed advertisements.

Co-author and Rotman professor Matthew Mitchell explains that enforcing ad transparency regulations on Instagram increases total sponsored content volume by 12 per cent. Among content that wasn’t labelled as advertising on the platform, the proportion that likely did have sponsorship increased by 10 per cent after transparency regulations were enforced.

“Our study shows that engagement also goes down,” Mitchell adds. “That’s consistent with the idea that people don’t engage as much with things they know are ads compared to things they think are at least in part organic.”

According to Statista, the global social media influencer industry was valued at US$21.1 billion in 2023, and is estimated to reach US$33 billion in 2025.

Before and after transparency legislation is enforced

While most jurisdictions, including Canada, have laws against deceptive or undisclosed advertising on the books, Mitchell says some countries were faster to apply those rules to social platforms than others.

For example, Germany implemented its ad disclosure regulations in 2016, and began handing out fines to German influencers who failed to comply the following year. That provided an opportunity for the researchers to explore the impact of those regulations in Germany, which they compared to a similar country where they hadn’t yet been applied, namely Spain.

The researchers trained a natural language processing algorithm on the content from both countries, explicitly labelled as sponsored to identify posts that had the same properties, even if they weren’t labelled as such.

“The total number of posts in Germany that our algorithm thinks are ads went up,” Mitchell says. “There were more ads in Germany post-regulation. What's really interesting is that the number of undisclosed ads in Germany went up relative to Spain, so you’re getting more disclosed ads in Germany, but you're also getting more undisclosed ads, and that’s not what [lawmakers] had in mind.”

How the influencer market is unique

Though the study didn’t provide an explanation for why enforcing advertiser transparency rules on social media has the opposite of the intended effect, Mitchell suggests it may have something to do with social media’s unique market dynamics. Most of the theory surrounding the cost and benefits of advertising transparency assumes a direct financial relationship between the advertising and the consumer, he says. That allows consumers to take direct action against dishonest practices by refusing to engage with or patronize the business.

“But an influencer and a follower do not typically exchange money in their relationship; the follower pays with attention,” he explains. “I can't just pay my neighbourhood influencer to be more honest.”

Mitchell adds that this market dynamic may differ on platforms that pay creators directly, like YouTube and TikTok, given the more direct relationship between content quality and earning potential. 

Though he can’t say for certain without further study, Mitchell speculates that the engagement metrics offer some explanation as to why advertising volume goes up when transparency requirements are enforced.

“It's worth keeping in mind that this seems to have lowered total engagement on the platform, which, of course, is central to what [advertisers] think about the ad’s effectiveness,” he says. “They get less engagement for every ad, so maybe they have to run more ads.”

What’s the solution?

If enforcing ad transparency makes social media less transparent, lawmakers will need to find a different solution.

In a separate 2021 research paper, Mitchell proposes one he feels would be effective, though he warns that it has not yet been studied in practice. “A better policy than disclosure regulations are opt-in disclosure regulation,” he says.

Mitchell explains that a blanket policy is difficult to enforce and has vastly different effects on brands of different sizes and scales of influence. For example, large, traditional companies may want to opt-in to a regulatory requirement around ad transparency so that positive organic content isn’t considered suspicious.

Less established brands, meanwhile, have little to gain from being more transparent. Even if they aren’t incentivized to label each post as sponsored, however, they would likely be willing to opt-into a system that allows them to avoid fines and penalties for declaring they do not adhere to those standards.

“Enforcing these [blanket] regulations is miserable,” Mitchell adds. “It's very difficult to look around the internet and try to find all the fake content or people lying about what’s sponsored, so this has the side benefit of being a little bit more implementable.”

As social media transparency becomes the subject of greater debate Mitchell says regulators will need to find a better solution than enforcing existing ad transparency legislation. “You have to be creative, because what works in buyer-seller markets doesn’t necessarily apply to social media.”