How does compression ratio affect IC engine performance?

Higher compression ratio increases thermal efficiency following η = 1 - (1/r^(γ-1)) for Otto cycle, as the working fluid reaches higher temperatures and pressures. However, in SI engines, excessive compression causes knocking (auto-ignition of fuel-air mixture), limiting practical ratios to 8-12. Diesel engines can use higher ratios (14-22) since only air is compressed. Higher compression also increases mechanical stresses, requiring stronger engine components and better cooling systems.