Ben pointed out that collaborative worldbuilding is his preferred method of gaming. I’m of a similar mindset — indeed, our local group is poised to build our own sci-fi setting for Wild Talents — but there’s a huge concern that GMs should keep in mind when embarking on this sort of venture.
Basically, the GM can’t keep very many secrets from the players. In a setting that’s only been sketched out on a legal pad or typed up as a quick Word doc, there will be precious few crunchy bits for players to chew on. As such, the GM needs to lay all the cards on the table so players can create nuanced characters with real goals. The GM shouldn't, for example, reveal a shadowy government organization six sessions into a campaign — because the commando player would be confused as to why his character didn’t have at least passing knowledge of the group initially. Little things are fine, but big story elements leave players scratching their heads thinking, "Huh? OK, I guess that's part of the game now." Get me?
Luckily, this quandary is really just an excuse to further fine-tune a collaborative setting. For the Sovereigns superhero setting I created with some friends back in 2002, we ended up codifying everything into a sourcebook that we then shared around the table. It’s also a great excuse to snatch ideas from published settings, which I do with great prejudice pretty much all the damn time. Need a space station for a character’s backstory? Flip open Transhuman Space, grab and idea and then present it to the players. Chances are that at least one other player will seize the concept and incorporate it into his or her character — and then you’re off and running.