What explains the range of situations in which individuals cooperate? This paper studies a theoretical model where individuals respond to incentives but are also influenced by norms of good conduct inherited from earlier generations. Parents rationally choose what norms to transmit to their offspring, and this choice is influenced by features of the external environment, such as the quality of external enforcement, or the pattern of likely future economic transactions. The equilibrium displays strategic complementarities between norms and current behavior, which reinforce the effects of changes in the external environment. Norms evolve gradually over time, and if the quality of external enforcement is chosen endogenously under majority rule, the equilibrium displays histeresis: adverse initial conditions may lead to a unique equilibrium path where external enforcement remains weak and inidividual norms discourage cooperation. Evidence from GSS surveys in the US is consistent with some of the model predictions. ∗I wish to thank seminar participants in seminars at IGIER and University of Naples for their comments, Giovanna D’Adda, Carlo Prato and Francesco Vecchi for outstanding research assistance. I am grateful to CIAR and Bocconi University for financial support. 1 1
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