During the origin of life, encapsulation of RNA inside vesicles is believed to have been a defining feature of the earliest cells (protocells). The confined biophysical environment provided by membrane encapsulation differs from that of bulk solution and has been shown to increase activity as well as evolutionary rate for functional RNA. However, the structural basis of the effect on RNA has not been clear. Here, we studied how encapsulation of the hairpin ribozyme inside model protocells affects ribozyme kinetics, ribozyme folding into the active conformation, and cleavage and ligation activities. We further examined the effect of encapsulation on the folding of a stem-loop RNA structure and on the formation of a triplex structure in a pH-sensitive DNA switch. The results indicate that encapsulation promotes RNA-RNA association, both intermolecular and intramolecular, and also stabilizes tertiary folding, including the docked conformation characteristic of the active hairpin ribozyme and the triplex structure. The effects of encapsulation were sufficient to rescue the activity of folding-deficient mutants of the hairpin ribozyme. Stabilization of multiple modes of nucleic acid folding and interaction thus enhanced the activity of encapsulated nucleic acids. Increased association between RNA molecules may facilitate the formation of more complex structures and cooperative interactions. These effects could promote the emergence of biological functions in an "RNA world" and may have utility in the construction of minimal synthetic cells.