In dryland ecosystems, land degradation and erosion pose severe threats to ecosystem productivity and human wellbeing. Bio‐inoculation of degraded soils with native biological soil crusts ('biocrusts') is a promising yet relatively untested means to improve soil stability and hydrologic function (i.e. increase infiltration and reduce runoff). In a degraded semi‐arid grassland on the Colorado Plateau, we studied the establishment and hydrologic function (via simulated rainfall) of induced biocrusts grown with and without an organic soil stabilizer (psyllium, derived from Plantago sp.), after a period of four months. We found evidence of biocrust establishment, including significantly higher biocrust cover, chlorophyll a, and exopolysaccarides (EPS) in inoculated plots compared to controls. Plots inoculated with biocrust had higher runoff and sediment yields than controls during rainfall simulation. However, this effect was mitigated in plots where stabilizer was added, resulting in greater soil aggregate stability and higher levels of infiltration (reduced total runoff). The time to ponding was significantly greater than control for all inoculated plots, suggesting that induced biocrusts may be most effective at improving infiltration under low‐intensity, smaller precipitation events. Notably, the biocrusts in this study lacked the rough surface microtopography which is common in well‐developed biocrusts regionally and likely instrumental in slowing overland flow and increasing infiltration for larger rain events. These results highlight the temporal lag that may exist between apparent and functional restoration of biocrusts. In addition, the simultaneous additions of stabilizing amendments with biocrust inoculum may work collectively to achieve both short and long‐term restoration targets.