In this paper, we present a motion compensated two-link chain coding technique to effectively encode 2-D binary shape sequences for object-based video coding. This technique consists of a contour motion estimation and compensation algorithm and a two-link chain coding algorithm. The object contour is defined on a 6-connected contour lattice for a smoother contour representation. The contour in the current frame is first predicted by global motion and local motion based on the decoded contour in the previous frame; then, it is segmented into motion success segments, which can be predicted by the global motion or the local motion, and motion failure segments, which can not be predicted by the global and local motion. For each motion failure segment, a two-link chain code, which uses one chain code to represent two consecutive contour links, followed by an arithmetic coder is proposed for efficient coding. Each motion success segment can be represented by the motion vector and its length. For contour motion estimation and compensation, besides the translational motion model, an affine global motion model is proposed and investigated for complex global motion. We test the performance of the proposed technique by several MPEG-4 shape test sequences. The experimental results show that our proposed scheme is better than the CAE technique which is applied in the MPEG-4 verification model.