Our group experimented with something like this for a d20 post-apocalyptic game. (I think we were swiping the node-and-link-generation part of an indie game called Verge, but I might be mistaken about the system's name.)
It was kind of a fun activity: each person at the table would take turns adding various things to the big sheet of butcher paper we were using, reinforcing the stuff they liked and occasionally vetoing the stuff they hated, and it did indeed have the result of making a setting that the players were fairly invested in. It also had the side effect of making the players fairly knowledgeable about the setting, which was nice. You could look at the big sheet and see what kinds of things people wanted out of the game and what they didn't want.
The downside of it was that ultimately it was a poor fit for the type of game we were after. We were in the mood for a more traditional GM-player arrangement, and this kind of setting creation system was better suited for a shared-narrative style of game. While our GM made a valiant effort to run a game using what we'd come up with, the bottom line was that it was not enough indians and a lot of spoiled broth: all that player input had pushed the game into this compromise state where the players sort of liked the setting and the GM sort of liked the setting but no one actually loved the setting, and for our group it turns out to be absolutely vital that the GM be really enthusiastic about the game. Without that enthusiasm, the GM doesn't get psyched about generating content for the game, which leaves the players feeling like it's all going nowhere and dissuades them from doing cool active-player things like coming up with long-term goals and agendas, and it's very unsatisfying.
So we canned it and switched to a game that our GM was genuinely excited about running (one where the setting was his own, created without player input), and it's been going really well. Our weekly session is packed with stuff to do, all the players are excited about their characters and very involved in the game, and it's really been a dramatic change for the better.
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your mileage might vary, of course, but i don't think our group will ever try this again
ryan