Current theory proposes that degenerated sex chromosomes-such as the mammalian Y-evolve through three steps: (i) recombination arrest, linking male-beneficial alleles to the Y chromosome; (ii) Y degeneration, resulting from the inefficacy of selection in the absence of recombination; and (iii) dosage compensation, correcting the resulting low expression of X-linked genes in males. We investigate a model of sex chromosome evolution that incorporates the coevolution of cis and trans regulators of gene expression. We show that the early emergence of dosage compensation favors the maintenance of Y-linked inversions by creating sex-antagonistic regulatory effects. This is followed by degeneration of these nonrecombining inversions caused by regulatory divergence between the X and Y chromosomes. In contrast to current theory, the whole process occurs without any selective pressure related to sexual dimorphism.