Bt cotton was genetically modified to produce insecticidal proteins targeting Lepidopteran pests and is therefore only minimally affected by caterpillar damage. This could lead to reduced levels of inherent, systemically inducible defensive compounds in Bt cotton which might benefit other important cotton herbivores such as plant bugs. We studied the effects of plant defense induction on the performance of the plant bug Lygus hesperus by caging nymphs on different food sources (bolls/squares) of Bt and non-Bt cotton which were either undamaged, damaged by Bt tolerant caterpillars, or treated with jasmonic acid (JA). Terpenoid induction patterns of JA-treated and L. hesperus-damaged plants were characterized for different plant structures and artificial diet assays using purified terpenoids (gossypol/ heliocide H1/4) were conducted. Nymphs were negatively affected if kept on plants damaged by caterpillars or sprayed with JA. Performance of nymphs was increased if they fed on squares and by the Bt-trait which had a positive effect on boll quality as food. In general, JA-sprayed plants (but not L. hesperus infested plants) showed increased levels of terpenoids in the plant structures analyzed, which was especially pronounced in Bt cotton. Nymphs were not negatively affected by terpenoids in artificial diet assays indicating that other inducible cotton responses are responsible for the found negative effects on L. hesperus. Overall, genetically engineered plant defenses can benefit plant bugs by releasing them from plant-mediated indirect competition with lepidopterans which might contribute to increasing numbers of hemipterans in Bt cotton.