Retinoic acid (RA) signaling is required for normal development of multiple organs. However, little is known about how RA influences the initial stages of lung development. Here, we used a combination of genetic, pharmacological and explant culture approaches to address this issue, and to investigate how signaling by different RA receptors (RAR) mediates the RA effects. We analyzed initiation of lung development in retinaldehyde dehydrogenase-2 (Raldh2) null mice, a model in which RA signaling is absent from the foregut from its earliest developmental stages. We provide evidence that RA is dispensable for specification of lung cell fate in the endoderm. By using synthetic retinoids to selectively activate RAR alpha or beta signaling in this model, we demonstrate novel and unique functions of these receptors in the early lung. We show that activation of RAR beta, but not alpha, induces expression of the fibroblast growth factor Fgf10 and bud morphogenesis in the lung field. Similar analysis of wild type foregut shows that endogenous RAR alpha activity is required to maintain overall RA signaling, and to refine the RAR beta effects in the lung field. Our data support the idea that balanced activation of RAR alpha and beta is critical for proper lung bud initiation and endodermal differentiation.