The prefrontal cortex (PFC) underlies higher cognitive processes that are modulated by nicotinic acetylcholine receptor (nAChR) activation by cholinergic inputs. PFC spontaneous default activity is altered in neuropsychiatric disorders, including schizophrenia-a disorder that can be accompanied by heavy smoking. Recently, genome-wide association studies (GWAS) identified single-nucleotide polymorphisms (SNPs) in the human CHRNA5 gene, encoding the α5 nAChR subunit, that increase the risks for both smoking and schizophrenia. Mice with altered nAChR gene function exhibit PFC-dependent behavioral deficits, but it is unknown how the corresponding human polymorphisms alter the cellular and circuit mechanisms underlying behavior. Here we show that mice expressing a human α5 SNP exhibit neurocognitive behavioral deficits in social interaction and sensorimotor gating tasks. Two-photon calcium imaging in awake mouse models showed that nicotine can differentially influence PFC pyramidal cell activity by nAChR modulation of layer II/III hierarchical inhibitory circuits. In α5-SNP-expressing and α5-knockout mice, lower activity of vasoactive intestinal polypeptide (VIP) interneurons resulted in an increased somatostatin (SOM) interneuron inhibitory drive over layer II/III pyramidal neurons. The decreased activity observed in α5-SNP-expressing mice resembles the hypofrontality observed in patients with psychiatric disorders, including schizophrenia and addiction. Chronic nicotine administration reversed this hypofrontality, suggesting that administration of nicotine may represent a therapeutic strategy for the treatment of schizophrenia, and a physiological basis for the tendency of patients with schizophrenia to self-medicate by smoking.