Some education policymakers focus on bringing down pupil–teacher ratios. Others argue that resources will have limited impact without systematic reforms to education governance, teacher incentives, and pedagogy. We examine a program under which school committees at randomly selected Kenyan schools were funded to hire an additional teacher on an annual contract renewable conditional on performance, outside normal Ministry of Education civil-service channels, at one-quarter normal compensation levels. For students randomly assigned to stay with existing classes, test scores did not increase significantly, despite a reduction in class size from 82 to 44 on average. In contrast, scores increased for students assigned to be taught by locally-hired contract teachers. One reason may be that contract teachers had low absence rates, while centrally-hired civil-service teachers in schools randomly assigned contract teachers endogenously reduced their effort. Civil-service teachers also captured rents for their families, with approximately 1/3 of contract teacher positions going to relatives of existing teachers. A governance program that empowered parents within school committees reduced both forms of capture. The best contract teachers obtained civil service jobs over time, and we estimate large potential dynamic benefits from supplementing a civil service system with locally-hired contract teachers brought in on a probationary basis and granted tenure conditional on performance.