The fact that agriculture is associated with negative external effects on ecosystems is of great concern. Most of these agri-environmental externalities are public goods in nature and therefore solving them through conventional market and regulation tools is challenging. Collective action has been identified as an option in dealing with externalities emanating from activities touching on agriculture and the environment especially in circumstances where markets and government regulation are not effective. In this paper we assess the potential for agri-environmental cooperation in dealing with agri-environmental externalities. The study achieves this objective using cross-sectional household survey data collected from 308 households in the Lake Naivasha basin, Kenya. Results indicate that non-cooperation is a dominant strategy in the Lake Naivasha basin. The study also identifies factors that influence the probability of cooperating and therefore could be catalysts to encourage cooperation. Such factors include expected private incentives, labour endowments and agricultural commercialization. Positive perceptions and attitudes, presence of social sanctions and norms of trust were also found to significantly influence cooperation. To deal with agri-environmental challenges through cooperation, policy needs to focus on facilitating selective incentives, awareness creation and embracing local participation in resource management.