Plants sense neighbor proximity as a decrease in the ratio of red to far-red light, which triggers a series of developmental responses. In Arabidopsis, phytochrome B (PHYB) is the major sensor of shade, but PHYB excitation has not been linked directly to a growth response. We show that the basic helix-loop-helix (bHLH) transcription factor PIF7 (phytochrome-interacting factor 7), an interactor of PHYB, accumulates in its dephosphorylated form in shade, allowing it to bind auxin biosynthetic genes and increase their expression. New auxin synthesized through a PIF7-regulated pathway is required for shade-induced growth, linking directly the perception of a light quality signal to a rapid growth response.