Gene regulatory divergence is thought to play a central role in determining human-specific traits. However, our ability to link divergent regulation to divergent phenotypes is limited. Here, we utilized human-chimpanzee hybrid induced pluripotent stem cells to study gene expression separating these species. The tetraploid hybrid cells allowed us to separate cis- from trans-regulatory effects, and to control for nongenetic confounding factors. We differentiated these cells into cranial neural crest cells, the primary cell type giving rise to the face. We discovered evidence of lineage-specific selection on the hedgehog signaling pathway, including a human-specific sixfold down-regulation of EVC2 (LIMBIN), a key hedgehog gene. Inducing a similar down-regulation of EVC2 substantially reduced hedgehog signaling output. Mice and humans lacking functional EVC2 show striking phenotypic parallels to human-chimpanzee craniofacial differences, suggesting that the regulatory divergence of hedgehog signaling may have contributed to the unique craniofacial morphology of humans.