A single-layer AgOx phase grown on Ag(111) efficiently transfers oxygen to Pd domains at room temperature, rendering the Pd-decorated surface highly reactive toward CO oxidation. Oxygen transfer from AgOx to Pd and the surface reactivity toward CO were investigated as a function of the Pd coverage using X-ray photoelectron spectroscopy, surface infrared spectroscopy of adsorbed CO, temperature-programmed reaction spectroscopy, and density functional theory (DFT) calculations. Our results show that all of the oxygen from the AgOx layer (∼0.375 monolayer) migrates to the surface of Pd during formation of a nearly complete Pd bilayer at 300 K and that the oxygen coverages generated on Pd increase as the Pd cluster size decreases, reaching values that exceed the oxygen concentration in the AgOx layer by as much as a factor of 2. Experimental measurements and DFT calculations show that preferential binding of oxygen on the edges of the Pd clusters enhances the oxygen coverage on Pd clusters of decreasing size and produces a heterogeneous spatial distribution of oxygen. CO adsorbs in high coverages at 100 K by binding on both the terraces and O-rich edges of the Pd clusters. During subsequent heating, oxidation of the adsorbed CO consumes nearly all of the oxygen that transferred from AgOx to the Pd domains; in contrast, the pure AgOx layer exhibits limited reactivity toward CO adsorbed at 100 K. These results demonstrate that differences in oxophilicity drive facile oxygen transfer from Ag to the edges of Pd nanoclusters and thereby give rise to an efficient pathway for CO oxidation on bimetallic PdAg surfaces. The cooperation between the Pd and Ag domains results in near-interfacial chemistry that may be broadly important in catalysis by bimetallic alloys.