Abstract: To improve service delivery, central governments often tie intergovernmental transfers to local policy performance. While such performance-based transfers can raise efficiency by incentivizing municipalities, they may also create equity losses by disproportionately rewarding high-capacity governments with larger transfers. We study this equity-efficiency trade-off using transfers to Brazilian municipalities. When two states tied transfers to relative educational performance, student test scores rose substantially: moving from the 25th to the 75th percentile of per capita conditional transfers increased scores by 0.13 standard deviations. However, the reform also widened funding disparities, as municipalities with higher pre-existing capacity received larger transfers. In contrast, contemporaneous reforms to unconditional transfers had negligible effects on student outcomes. A simple model of optimal transfers interprets these findings, suggesting that performance-based transfers deliver large efficiency gains, limited equity costs, and should constitute a sizable share of the optimal transfer mix. We find minimal evidence of multitasking distortions or score manipulation. Instead, we document increased education-related inputs and suggestive evidence of reduced corruption.