Most examples of cooperation in nature share a common feature: individuals can interact to produce a productivity benefit or fitness surplus, but there is conflict over how these gains are shared. A central question is how threats to exercise outside options influence the resolution of conflict within such cooperative associations. Here we show how a simple principle from economic bargaining theory, the outside option principle, can help to solve this problem in biological systems. According to this principle, outside options will affect the resolution of conflict only when the payoff of taking up these options exceeds the payoffs individuals can obtain from bargaining or negotiating within the group; otherwise, threats to exercise outside options are not credible and are therefore irrelevant. We show that previous attempts to incorporate outside options in synthetic models of reproductive conflict fail to distinguish between credible and incredible threats, and then we use the outside option principle to develop credible synthetic models in two contexts: reproductive skew and biparental care. A striking prediction of our analysis is that outside options are least relevant to the resolution of conflict in cooperative groups of kin and are most relevant in transient associations or interactions among nonrelatives. Our analysis shows a way to link the resolution of within-group conflict to the environmental setting in which it occurs, and it illuminates the role of threats in the evolution of social behavior.