Programmed death-ligand (PD-L)1 and PD-L2, newer B7 superfamily members, are implicated in the negative regulation of immune responses and peripheral tolerance. To examine their function in alloimmunity, we used the murine model of orthotopic corneal transplantation. We demonstrate that PD-L1, but not PD-L2, is constitutively expressed at high levels by the corneal epithelial cells, and at low levels by corneal CD45+ cells in the stroma, whereas it is undetectable on stromal fibroblasts and corneal endothelial cells. Inflammation induces PD-L1 up-regulation by corneal epithelial cells, and infiltration of significant numbers of PD-L1+CD45+CD11b+ cells. Blockade with anti-PD-L1 mAb dramatically enhances rejection of C57BL/6 corneal allografts by BALB/c recipients. To examine the selective contribution of donor vs host PD-L1 in modulating allorejection, we used PD-L1-/- mice as hosts or donors of combined MHC and minor H-mismatched corneal grafts. BALB/c grafts placed in PD-L1-/- C57BL/6 hosts resulted in pronounced T cell priming in the draining lymph nodes, and universally underwent rapid rejection. Allografts from PD-L1-/- C57BL/6 donors were also significantly more susceptible to rejection than wild-type C57BL/6 grafts placed into BALB/c hosts, primarily as a result of increased T cell infiltration rather than enhanced priming. Taken together, our results identify differential roles for recipient vs donor PD-L1 in regulating induction vs effector of alloimmunity in corneal grafts, the most common form of tissue transplantation, and highlight the importance of peripheral tissue-derived PD-L1 in down-regulating local immune responses.