Democracies rarely fight interstate wars against one another, but democratic dyads frequently engage in hostile acts short of war, such as militarized interstate disputes and the backing of coups. Do democracies wage proxy war against other elected regimes by aiding rebels with weapons and other assistance? Scholars have found that democracies generally avoid doing so—a phenomenon we term the “democratic embargo.” However, the democratic embargo remains under-theorized. Using both datasets and close examination of purported instances of democratic aid to rebels fighting other democracies, we show that the democratic embargo is stronger than first thought. In addition, we explain the democratic embargo by arguing that strong democratic institutions prevent elected leaders from engaging in proxy war against sister regimes, and embargo violations tend to occur when democratic institutions are weak. We test our theory in two ways. First, using large-N qualitative analysis (LNQA), we examine all potential exceptions to the democratic embargo between 1945 and 2011 to establish the external validity of our claim. Second, we use case studies of the Irish decision not to aid rebels fighting the United Kingdom in Northern Ireland and Pakistan’s decision to support rebels fighting India in Kashmir to assess the internal validity of our theoretical logic. The results provide clear support for our institutional explanation of the democratic embargo. Our argument has significant implications for the democratic peace theory, the study of proxy wars, and the capacity of democracies to fight rebellions.