Nah OSCAR, the stair stepping is not the joystick's fault, it's the game he's playing. What's happening is that the joy is held in a diagonal, which activates two switches. The game, which is suppose to use a 4-way goes through its input logic, and detects the first switch, so it makes the direction go in that direction, then it detects the second switch, and so it makes the direction go in THAT second direction. It repeats that over and over, so you get a stair-step effect.
The solution is DON'T use an 8-way stick with 4-way games.
Since Rhetro said he's using a microswitch joystick, there's no such thing as "sensitivty". A microswitch is either on or off. What would be interesting is if there were an option to turn off diagonals in MAME. I know some SNES emulators have this option...