Biodegradable polymer blends of high-molecular-weight poly(3-hydroxybutyrate) (PHB) and poly(lactic acid) (PLA) are not miscible in general. Yet, by decreasing the molecular weight of PHB, the low-molecular-weight PHB could have improved miscibility with the PLA. In this study, a melt-induced degradation process of PLA/PHB blends was therefore implemented, termed the in-situ self-compatibilization approach, to produce low-molecular-weight PHB during melt blending process. The solution blends of PLA and oligomer PHB (PLA/OPHB) were also prepared as a basis to understand the role of low-molecular-weight PHB to improve its miscibility with PLA in PLA/PHB blends. Only one single glass transition temperature (Tg) was found for the resulting PLA/PHB blends at compositions of 95/05 to 80/20, proving that the miscibility was greatly improved by decreasing molecular weight of PHB. Because the degraded PHB had a relatively lower Tg, it thus provided plasticization effect to the PLA and resulted in the decreased crystallization temperature. Moreover, with increasing PHB content to 20% in the blend, the elongation at break increased significantly from 7.2% to 227%, more than 30-fold. The extensive shear yielding and necking behavior were observed during tensile testing for the blend of 80/20. The localized plasticization within PLA/PHB matrix with the reduction of local yield stress and the well-dispersed PHB crystallites were the major contributing factors to trigger shear yielding phenomenon. Moreover, initial modulus decreased only 20%, from 1.68 to 1.35 GPa. A common problem of severely reduced stiffness from the added plasticizer encountered in the plasticized PLA blends was therefore not perceived here.