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Research on ethnicity and conflict treats the concept of ethnicity as defining the actors in these conflicts, whereas research on the construction and maintenance of ethnic identity explores why ethnicity unifies individuals into a single social group. What happens when this unifying concept is divided between two enemy countries? How does this situation influence peace settlements over territorial issues, armed conflict, and economic relations between these countries? To answer these questions, I create a continuous measure of ethnic similarity between rivals. I find that ethnic similarity can facilitate cooperation and exacerbate conflictual interactions between rivals, but governments will seek to limit interactions with their rival when the cross border ethnic groups are minorities. In addition, I create categorical predictors of ethnic similarity, which reveal nuances in these relationships. Specifically, rivalries sharing a pan-ethnic identity are more likely to engage in conflict regardless of actual ethnic similarity, and dyads with a majority in one country sharing ethnicity with a minority in another country are less likely to fight once in a state of rivalry. This is because a quid pro quo exists between these rivals where one rival can reduce oppression of the minority in exchange for the other rival not supporting secessions by their co-ethnics. These pairs of rivals also are more likely to attempt peace settlements. Contested nations, which are rivalry-dyads with similar ethnic majorities, are both the most likely of the ethnically similar rival categories to engage in militarized interstate disputes, but also engage in larger amounts of interstate trade.