Should Platforms be Held Liable for Defective Third‐Party Goods?

ABSTRACT This paper develops a model of platform liability for ex post compensation of consumer harm caused by third‐party sellers. A platform chooses how liability is shared with sellers, but assumes no liability because it reduces sellers' safety investments. Mandated platform liability can increase or decrease consumer surplus: it is more likely to be beneficial when the platform has weak market power or faces competition, but less so when it sells first‐party goods or third‐party sellers are judgment‐proof. When the platform invests in screening judgment‐proof sellers, liability regulation encourages investment, increasing welfare gains. Regulations targeting only incumbents may deter platform entry.