This seems a lot to me like a
Why Does the World Exist debate. Or at least a corollary. Without knowing why the world exists it is hard to formulate a structure for the proper expression of it.
If the world has a purpose other than just a place in which to adventure, then it has to be well developed and "powerful" enough to make an impression on the characters (and by extension the players) so that they understand they have an environment in which to work that is more important than their own interests. Therefore world building is ultimately more important than the individual characters who inhabit it. It doesn't really matter whether the world is fully developed (and what world is ever fully developed, it's like saying our world is fully developed, our world is only fully developed at this moment in time based upon what we know, in twenty to fifty years there will be a different world with different developments, just as the beginning of the 20th Century seems like an almost completely different world than the beginning of the 21st century) or not at the beginning of play in it, the point is that it is the world that makes demands upon the players and characters, and not the other way around. It's not the specific degree of complexity of development, it is the degree of impression those developments make upon the players and characters, or not.
On the other hand if the world exists to service the characters or the characters and players operate in such a way as to "create or recreate" the world as they go along, then you don't need a developed world in the sense of the first point, because it is really the players who will "construct or reconstruct" the world under the auspices of the DM. That is to say it appears as if the DM is building the world as you go along, but that's only the appearance. The players are both queuing and cueing the DM on what they desire the world to be like and he in turn is constructing the outline as he goes along based upon their voiced or unvoiced demands and desires.
The first choice is a little bit like Novel writing (though one in which the author develops plot and setting, but cannot control the actions of his characters, character control is always outside the realm of DM control - character control is not the job of the DM -
a lot of people seem to forget that in writing a novel characters are always under your control, in gaming they never truly are), and therefore the world has purpose which the players and characters service. The second choice is more like an impromptu play or a group created story and the DM is not the author of director but rather the coordinator of how various elements fit together at any given point in time in relation to the players and characters.
Personally I don't see either as unnecessary, or as being mutually exclusive endeavors, though I can see all kinds of ranges and varying degrees of emphasis in both approaches as regards how the players, their characters, and the world interact.
And I also don't see why you can't easily have both.
Or wouldn't want to have both. Having both is it seems to me far more ideal than having just one or the other. Create one or more areas of more detail in which the characters can operate by understanding not only their abilities, but their limitations as well. One area in which the world makes demands upon them. And create other areas which are basically unexplored, uncivilized, untamed, and "open frontier."
To me the great points of history, literature, myth, religion, society, science, exploration, and adventure have always been where these two areas collide, at the frontier of what is known/unknown, and at the edge of what is understood/not understood. Where the world you know, and the world that is as yet unexplored (at least by the individual(s) involved, to Theodore Roosevelt the Amazon was the Frontier, the Undiscovered Country, to an Amazonian tribesman, Washington DC would have been) clash.
In that way the player and characters always have a base of operations, a world that is stable and in which they know what the rules are, and in which they must follow the law, and another world in which they may operate freely and remake the world as they see fit and best. They have a world of Order, and they have a world of Potential. To me it always seems best to have both an Old World, and a New World.
And always have a real Frontier that men can step back and forth across in order to explore and test different aspects of themselves, and of the world.
So yeah, me personally, as a DM, I prefer a more well developed, as in created world that makes demands upon the players and characters. (Because limitations and responsibilities are at least as important to "true character development," both in-game and in real life, as are liberties.)
However I am always very conscious of the Frontier, and of the
Undiscovered Country in which the players and characters become the New Law and reshape the New World in some fundamental way(s), either to improve it, or to corrupt it. Or as the case usually turns out to be, both.
So my advice is, there's always a
World you Know, and there is always a
World you Don't. The world you know is for you as the DM to create and order and is used to force demands upon the players, and the world you don't is for the players to create, and that's not really your world, it's theirs, and it is for them to see what they will make of it.
You have your job, they have theirs.
You make your world, they make theirs.