Hallucinations, a cardinal feature of psychotic disorders such as schizophrenia, are known to depend on excessive striatal dopamine. However, an underlying cognitive mechanism linking dopamine dysregulation and the experience of hallucinatory percepts remains elusive. Bayesian models explain perception as an optimal combination of prior expectations and new sensory evidence, where perceptual distortions such as illusions and hallucinations may occur if prior expectations are afforded excessive weight. Such excessive weight of prior expectations, in turn, could stem from a gain-control process controlled by neuromodulators such as dopamine. To test for such a dopamine-dependent gain-control mechanism of hallucinations, we studied unmedicated patients with schizophrenia with varying degrees of hallucination severity and healthy individuals using molecular imaging with a pharmacological manipulation of dopamine, structural imaging, and a novel task designed to measure illusory changes in the perceived duration of auditory stimuli under different levels of uncertainty. Hallucinations correlated with a perceptual bias, reflecting disproportional gain on expectations under uncertainty. This bias could be pharmacologically induced by amphetamine, strongly correlated with striatal dopamine release, and related to cortical volume of the dorsal anterior cingulate, a brain region involved in tracking environmental uncertainty. These findings outline a novel dopamine-dependent mechanism for perceptual modulation in physiological conditions and further suggest that this mechanism may confer vulnerability to hallucinations in hyper-dopaminergic states underlying psychosis.