I show they can invert the relationship between the stability of cooperation and polarization of policy preferences by changing individual risks of leaving the grand coalition. I find that polarization stabilizes cooperation under norms with high sensitivity to moderates' preferences and destabilizes it under norms with low sensitivity. Further, the polarization of moderates makes extremists less willing to cooperate under some norms and more willing to cooperate in others. This work sheds light on the effects of norms on cooperative efforts, like social movements such as the Black Lives Matter and the Arab Spring, involving diverse political actors in uncertain political environments.

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.