How epithelial progenitor cells integrate local signals to balance expansion with differentiation during organogenesis is still little understood. Here, we provide evidence that the Hippo pathway effector Yap is a key regulator of this process in the developing lung. We show that when epithelial tubules are forming and branching, a nucleocytoplasmic shift in Yap localization marks the boundary between the airway and the distal lung compartments. At this transition zone, Yap specifies a transcriptional program that controls Sox2 expression and ultimately generates the airway epithelium. Without Yap, epithelial progenitors are unable to properly respond to local TGF-β-induced cues and control levels and distribution of Sox2 to form airways. Yap levels and subcellular localization also markedly influence Sox2 expression and differentiation of adult airway progenitors. Our data reveal a role for the Hippo-Yap pathway in integrating growth-factor-induced cues in the developing and adult lung potentially key for homeostasis and regeneration repair.