When Silence Speaks: Dynamic Learning and Hidden Action in Attorney-Client Relationships

We model the attorney-client relationship as a dynamic moral hazard problem where the client faces a difficult inference challenge. Clients learn about case quality by “learning from silence,” but silence is a noisy signal: it can mean the case is weak, or that an attorney, enjoying the profitable “quiet life” of hourly fees, is shirking the unobservable effort needed for success. We characterize the attorney’s effort strategy as a real option to delay. Contingency fees dismantle the “quiet life” by creating high-powered incentives that reduce this option’s value. Combining ex-ante screening with our dynamic learning framework, the model generates predictions–fewer dropped cases and faster resolutions under contingency fees–that are consistent with key empirical findings.