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Xinyu Hua & Kathryn E. Spier, Holding Platforms Liable (HKUST Bus. Sch. Research Paper No. 2021-048, 2021).

Abstract: Should platforms be held liable for the harms suffered by users? A two-sided platform enables interactions between firms and users. There are two types of firm: harmful and safe. Harmful firms impose larger costs on the users. If firms have deep pockets then platform liability is unnecessary. Holding the firms liable for user harms deters the harmful firms from joining the platform. If firms are judgment proof then platform liability plays an instrumental role in reducing social costs. With platform liability, the platform has an incentive to (1) raise the interaction price to deter harmful firms and (2) invest resources to detect and remove harmful firms from the platform. The residual liability assigned to the platform may be partial instead of full. The optimal level of platform liability depends on whether users are involuntary bystanders or voluntary consumers, and the intensity of platform competition.