Laura, may I assume you're in the U.S.?

Check out cotton or recycled paper pet bedding, available from pet shops, and add your preferred type of adhesive in the amount you want.

One thing I would love to get hold of is the ground paper that is collected from banks (etc) and ground up in trucks right at the collection site.  Sometimes it is dyed green or brown and spewed as biodegradable soil mulch. 

Another source of chopped/shredded paper (not ground) is in the form of bagged insulation at places like Home Depot.  It does include some borax as a fire retardant, but I don't see that as a problem unless you fluff it all into the air and then stick your head into the dust cloud and inhale deeply.  Maybe it will produce fire-retardant PM!

I think the mouse problem is true.  An acquaintance made paper pulp w/cooked flour glue and pressed them into candy molds to make lightweight jewelry.  She dried them well, then had to put them in a drawer until she could continue with the project.  When she came back to them, they had been gnawed on.  She was disappointed to have just made what she called 'mouse cookies'.

Sue