Explanations of the enduring Greek-Turkish rivalry found upon neorealist and neoliberal assumptions, undercut by epistemological limitations, have been repeatedly falsified by empirical evidence while culturalist accounts emphasizing the centrality of prevailing norms related to identity and ethnocentrism fail to predict social change. An alternative explanation relying on a thick rational choice approach focusing on the two states‟ domestic scenes and exploring their interaction with interstate bargaining is offered. Methodologically, two analytic narratives of their institutional evolution are constructed by identifying key actors, mapping out their incentives and exploring their strategic interaction. Two policy shifts, namely the Greek Helsinki strategy and the Turkish acceptance of the Annan Plan are selected to explore domestic mechanisms of preference formation and expose the limitations of alternative accounts. In the Greek case the impact of international diplomacy on policy equilibria through its linkage to domestic institutional structures is explored, while in the Turkish case policy equilibria are contingent upon the relative success of anti-Kemalist collective action. These policy equilibria inform negotiators‟ utility functions during interstate bargaining. The thesis, emphasizing the analytical importance of parallel exploration of domestic sources of foreign policy and interstate bargaining, strives to model the interaction over the Aegean Sea dispute using negotiator preferences exposed by the analysis of two shifts on issues only indirectly related to the Aegean Sea dispute. The thesis focuses on two normative constructs, rigidity and Kemalism, as informal institutions which define available strategies on all issues of bilateral interest. Overcoming problems with assigning preferences, the approach demonstrates how the two states are unable to communicate honestly under incomplete information, in order to switch from a non-cooperative to a cooperative equilibrium, despite domestic institutional change. Although realist accounts predict the difficulties with international cooperation, this approach offers a more realistic image of the bilateral relation and is able to account for a broad range of policy shifts.