Some games you want it to be impossible to see the divisions you talk about:
But an example of one still hasn't surfaced. 
...
And ATM 1024 (10 bits) is all that's needed for those few games that need > 256.
And those games are....?
Okay, term2 was a bad example; it's only 8 bits internally.
I still stick with lightgun games with > 256 res. I know, an analog joystick is not a lightgun, but if you control with the joystick....
Take Operation Wolf and Point Blank 2. Op Wolf converts (for the X axis) from the 256 values to 320. (Yes, mame will need driver source changes to effectively use an analog joystick > 256.) Point Blank 2, OTOH, allots
687 values for the X axis input port in the first place, so no convertions are needed in the driver source.
I know you don't need single pixel accuraccy, and the original games were coded to cover the original hardware's range of error. However, up-converting like in OpWolf & Point Blank2 in mame adds to the user's error range. And IMO joysticks already have a larger error range than the original lightguns as you aren't getting the refferences of pointing someting at the screen (unless you're using a calibrated positional gun, not a normal joystick).
I also know that my motor control it's very precise, and that shrinking the range of movement increases the error due to me than if it wasn't restricted. However, let's take a positional gun hack, for example. Let's say the hacked hardware could output 256x256 before it was hacked, but after the hack it only had a little more than half the monvement (say, 144x144), but some of that shots are off-screen (say 128x96 for the screen). The movement is "restricted" less than the encoder was designed for, but the actually movement of the gun is a "full" range.
How many lightgun games have resolutions like Point Blank 2? Seven if you don't include clones @ 640x480, and two @ (sort of near) 512x236.
Not very many, but at least a few.
I was going to suggest Hard Drivin', but I can't hard info on it
from work ATM. IIRC, it has a 5 turn wheel, and 12 bits for the wheel, but no one has a 5 turn wheel and it's filtered to the
lower 8 bits. If it was filtered to the upper 8 bits, I'd be totally out of the water, but as is, 4096 (12 bit) / 5 = ~820 values per rotation. These numbers are not solid, though, so I won't list this as one of the games.
On a different note, I found this from
historical atari VAX mail:
From: KIM::MILTY 18-JUL-1991 08:06:16.14
To: @ENCODER.LIS
CC:
Subj: OPTICAL ENCODER USES
I HAVE BEEN ASSIGNED THE TASK OF DESIGNING THE NEXT GENERATION "TESTER"
FOR THE OPTICAL ROTARY ENCODER (THE LITTLE GUY ,ABOUT THE SIZE OF OUR 5K
POT ).
"I NEED INPUT"..HOW IS THIS ENCODER ENVISIONED BEING USED ?
I MEAN ,IN TERMS OF RESOLUTION.....HOW FAST WILL IT SPIN...?
THE OUTPUT RATE IS 128 PULSES/REVOLUTION PER CHANNEL (2 CHANNELS
IN QUADRATURE 90 DEGREES APART )
"BADLANDS STEERING" WAS 1:1 WITH A 58 PULSES/REVOLUTION RATE.
"WHIRLY-GIG IS 1:1 WITH A 72 " " "
"RACE DRIVIN (COMPACT)" 1:1 WITH A 72 " " "
"ROADBLASTERS" WAS GEARED 1:4 WITH A 36 P/R RATE....BUT THEN
THE STEERING WAS RESTRICTED TO 1/2 TURN,SO A
TOTAL OF 72 PULSES WOULD BE "SEEN" FROM
LOCK TO LOCK OF THE STEERING CONTROL.
....SOOO,LOOKING DOWN THE ROAD,...HOW MUCH "RESOLUTION" COULD WE
USE ,...
"GUMBALL RALLY" HAD AN ENCODER ON EACH MOTOR WHICH COULD SPIN AS FAST
AS 3600 RPM WITH 24 PULSES/ROTATION (1440 PULSES/SEC )...TO DO THE
SAME JOB THIS NEW ENCODER WOULD NEED TO SPIN AT 675 RPM.
...[snip]...
MILTY
Sorry, it originally was in allcaps; I didn't do it.
edit: fixed quote marks