Biodegradable poly(lactide)/poly(butylene adipate-co-terephthalate) (PLA/PBAT) blends were prepared by reactive blending in the presence of chain-extenders. Two chain-extenders with multi-epoxy groups were studied. The effect of chain-extenders on the morphology, mechanical properties, thermal behavior, and hydrolytic degradation of the blends was investigated. The compatibility between the PLA and PBAT was significantly improved by in situ formation of PLA-co-PBAT copolymers in the presence of the chain-extenders, results in an enhanced ductility of the blends, e.g., the elongation at break was increased to 500% without any decrease in the tensile strength. The differential scanning calorimeter (DSC) results reveal that cold crystallization of PLA was enhanced due to heterogeneous nucleation effect of the in situ compatibilized PBAT domains. As known before, PLA is sensitive to hydrolysis and in the presence of PBAT and the chain-extenders, the hydrolytic degradation of the blend was evident. A three-stage hydrolysis mechanism for the system is proposed based on a study of weight loss and molecular weight reduction of the samples and the pH variation of the degradation medium.