I find that norms of compromise are able to invert the relationship between stable cooperation and polarization by changing individual risks of leaving the grand coalition. For example, polarization can stabilize cooperation under norms with high sensitivity to moderates' preferences and destabilize it under norms with low sensitivity. I also find that skewing moderate preferences towards extremists makes the same extremists less willing to cooperate under some norms and more willing to cooperate under others. These results highlight the importance of considering the interaction between diversity and culture to establish the causal effects of diversity on cooperation. They also shed light on how norms interact with cooperative efforts in uncertain political environments involving diverse political actors, like social movements.

We provide a model in which local governments use taxation and agents adjust social networks to address these identity expression externalities. We find that taxation and network adjustments can be strategic complements or substitutes depending on agents' taste for out-group identity expression: the marginal value of taxation as a tool to regulate identity expression can be increasing or decreasing in agents' exposure to out-group identity expression. We show how diversity affects social networks and taxation, and how the existence of a tax response to identity expression externalities impacts network adjustments. Based on our theoretical framework we estimate a simultaneous equations model using US city data on ethnic diversity, taxation, and segregation. Our results provide suggestive evidence that taxation and network choice are strategic complements in addressing moderately positive ethnic identity expression externalities. Interpreting the empirical results through the lens of our model implies that agents' desire to segregate decreases when city governments use taxation to regulate identity expression.