The exact process of muscle contraction is fairly complicated, but it's essentially like a bunch of scales or shingles that slide over each other. You could sort of think of it like a series of linear-induction motors stacked up so that the armature of one carries the field coils for the next. Or, if you prefer, look at how a radio antenna telescopes in and out, then envision it as flat rather than cylindrical.
Gripping something tighter will reduce the length of time that you can hold it, since the lactic acid and other fatigue poisons will accumulate faster. Your wrist might get stronger all of the time, since muscles grow by being damaged and then repairing themselves to be bigger. There's also the possibility, I suppose, of developing carpal tunnel syndrome, but I think that's more caused by repetive motion rather than tension.
I would think, having played the game in my youth, that the worst thing about gripping as hard as you can would be the reduction of flexibility in handling the paddle. You'd probably have better control and speed with a firm, yet moderate, pressure.
edit: Oops; just saw your post, Jim. Good one.