We investigate the economic relation between two common approaches to tackling water scarcity and adapting to climate change, namely expanding water-storage capac- ities and improving water-use efficiency. We build, analyze, and extend a simple model for capacity choices of dams, incorporating stochastic, dynamic control of water inventories and efficiency in water use. We show that expanding water-storage capacities could encourage water users to improve water-use efficiency and improving water-use efficiency could increase optimal dam sizes even if water-use efficiency improvement decreases the water demand. This possibility of complementarity is numerically illus- trated by an empirical example of the California State Water Project. Our analysis suggests that, if complementarity holds, resources should be distributed in a balanced way between water-storage expansions and water-use efficiency improvement instead of being invested on one activity while the other being ignored. Implications of this paper are applicable to the storage demand and consumption efficiency of other resources, for example, energy and food.