Let's find the aforementioned theory!!
All I can find is a collection of theories on tvtropes and a couple sound like the (oh so brief) description, although none of them is very long.http://tvtropes.org/pmwiki/pmwiki.php/WMG/YumeNikki
To save yourselves the long scrolling, just ctrl+f:>Madotsuki is in a hospital.>Madotsuki is a patient in a mental institute
(nothing to do with a car wreck, I know)>This isn't Madotsuki's dream
(traffic accident IS involved)