Retinoid signaling plays a crucial role in patterning rhombomeres in the hindbrain and motor neurons in the spinal cord during development. A fundamentally interesting question is whether retinoids can pattern functional organization in the forebrain that generates a high order of cognitive behavior. The striatum contains a compartmental structure of striosome (or “patch”) and intervening matrix. How this highly complex mosaic design is patterned by the genetic programs during development remains elusive. We report a developmental mechanism by which retinoid receptor signaling controls compartmental formation in the striatum. We analyzed RARβ −/− mutant mice and found a selective loss of striosomal compartmentalization in the rostral mutant striatum. The loss of RARβ signaling in the mutant mice resulted in reduction of cyclin E2, a cell cycle protein regulating transition from G 1 to S phase, and also reduction of the proneural gene Mash1 , which led to defective neurogenesis of late-born striosomal cells. Importantly, during striatal neurogenesis, endogenous levels of retinoic acid were spatiotemporally regulated such that transduction of high levels of retinoic acid through RARβ selectively expanded the population of late-born striosomal progenitors, which evolved into a highly elaborate compartment in the rostral striatum. RARβ −/− mutant mice, which lacked such enlarged compartment, displayed complex alternations of dopamine agonist-induced stereotypic motor behavior, including exaggeration of head bobbing movement and reduction of rearing activity. RARβ signaling thus plays a crucial role in setting up striatal compartments that may engage in neural circuits of psychomotor control.