This article provides a review of recent developments in our understanding of how cochlear nonlinearity affects sound perception and how a loss of the nonlinearity associated with cochlear hearing impairment changes the way sounds are perceived. The response of the healthy mammalian basilar membrane (BM) to sound is sharply tuned, highly nonlinear, and compressive. Damage to the outer hair cells (OHCs) results in changes to all three attributes: in the case of total OHC loss, the response of the BM becomes broadly tuned and linear. Many of the differences in auditory perception and performance between normal-hearing and hearing-impaired listeners can be explained in terms of these changes in BM response. Effects that can be accounted for in this way include poorer audiometric thresholds, loudness recruitment, reduced frequency selectivity, and changes in apparent temporal processing. All these effects can influence the ability of hearing-impaired listeners to perceive speech, especially in complex acoustic backgrounds. A number of behavioral methods have been proposed to estimate cochlear nonlinearity in individual listeners. By separating the effects of cochlear nonlinearity from other aspects of hearing impairment, such methods may contribute towards identifying the different physiological mechanisms responsible for hearing loss in individual patients. This in turn may lead to more accurate diagnoses and more effective hearing-aid fitting for individual patients. A remaining challenge is to devise a behavioral measure that is sufficiently accurate and efficient to be used in a clinical setting.