Public organizations are often characterized by rigid rules and procedures. Can discretion in personnel decisions improve governance performance? This paper investigates how discretion in internal appointments affects the functioning of public organizations. We study an organizational reform in China’s imperial bureaucracy that modified the appointments of certain governorships from a rule-based process to a more discretionary method. We find that discretionary appointments improved public goods provision and led to greater state responsiveness. We provide evidence consistent with better selection: (1) discretion increased observable officer quality measured by experiences and civil exam qualifications; (2) exploiting the quasi-random rotations of governors to prefectures, we show that governors having previously been selected by discretion performed better. Evidence also suggests that the incentive effect is another mechanism. Finally, we provide evidence suggesting that the benefit of discretion depends on the incentive alignment of decision-makers with the organization.