The mechanism and sources of selectivity in the palladium-catalyzed propargylic substitution reaction that involves phosphorus nucleophiles, and which yields predominantly allenylphosphonates and related compounds, have been studied computationally by means of density functional theory. Full free-energy profiles are computed for both H-phosphonate and H-phosphonothioate substrates. The calculations show that the special behavior of H-phosphonates among other heteroatom nucleophiles is indeed reflected in higher energy barriers for the attack on the central carbon atom of the allenyl/propargyl ligand relative to the ligand-exchange pathway, which leads to the experimentally observed products. It is argued that, to explain the preference of allenyl- versus propargyl-phosphonate/phosphonothioate formation in reactions that involve H-phosphonates and H-phosphonothioates, analysis of the complete free-energy surfaces is necessary, because the product ratio is determined by different transition states in the respective branches of the catalytic cycle. In addition, these transition states change in going from a H-phosphonate to a H-phosphonothioate nucleophile.