Collective Inaction and Investment: The Political Economy of the Religious Liberty and Charitable Donation Protection Act

Abstract

This Article uses the 1998 Religious Liberty and Charitable Donation Protection Act ("the Act") to understand the phenomenon of collective inaction among well organized groups. It argues that the Act was the result of a investment decision made by creditor groups that required passivity. Although the evidence is sparse, it is consistent with well organized creditor groups choosing to postpone investing in opposing a specific bankruptcy reform. The expected gains from making an investment in such reforms in the future exceeded the gains from an immediate investment in such reform. Delay maximized creditor groups' expected return over time from the package of reforms urged by them. Inaction was not the result of an inability to make cost-justified organizational efforts to oppose the Act. Nor was it an implicit "bargain," even in the extended sense of the term, between creditor groups and religious organizations in which creditor inaction was the price paid for the prospect of increased success in their ongoing efforts to have the Bankruptcy Code amended in their favor. Creditor inaction was unilateral, not a collusive outcome between creditors and religious groups, the main proponents of the Act. It was the same sort of investment decision as is made by any party who decides to delay incurring irretrievable costs.

Part I describes the dominance of collective action models of legislative action. Part II briefly describes the Act's provisions and its legislative history, and argues that the Act cannot plausibly be understood by collective action models. Drawing on supporting case studies of salient phenomena in the political economy of trade protection, it also argues that the failure of well organized groups to act may not be an isolated occurrence. Part III considers and rejects some conventional explanations of creditor inaction consistent with the collective action models. Part IV analyzes creditor passivity as a deliberate postponement of an investment in bankruptcy reform and argues that the analysis is plausible. It suggests that creditor groups had a real option on maintaining existing fraudulent conveyance law, which remained more valuable unexercised than exercised. Part V concludes by briefly summarizing the Article's argument. An Appendix estimates the aggregate amount of prebankruptcy charitable contributions and describes bankruptcy law's effect on debtors' tax-driven incentives to make them.