When I read about the Lake Geneva Greyhawk campaign, I always thought it odd that Gary Gygax was both a player and a referee in it. Somehow that seemed to be "cheating."I eluded in various posts that I was heavily involved in NERO Live Action Roleplaying for over a decade. I was also one of the organizers and General Manager of a NERO chapter, NERO ARGO, for several years as well. Along the way I ran over two dozen events that for the most part have been well-liked.
How this ties into James' statement is that when I read the Gary's, Rob Kuntz's, David Arenson's and Major Welsey's accounts of those early sessions was how much they seemed like LARPS as well as tabletop games.
Where they intersect was managing game sessions that could easily have 15+ players and campaigns with even a larger group of player. This exactly the type of issue that LARP chapters have to deal with. The anecdotes and what they did to handled things sounds eerily familiar to what I had to deal with as a event director and general manager for NERO. As D&D and RPGs developed most of the LARP elements went away in favor of a referee with a dozen or less players. Typically between 4 to 8 players.
In LARPS is very common for a person to be a event director one month and a player the next. The key element that makes this work is the fact there are multiple event directors running different plots. For the most part each event director is doing their own thing in the context of whatever background the LARP setup for the setting.
While I ran many events but I still didn't know what Josh, or Chris were doing for their events. So I could come and be a PC without any undue advantage over other players. In NERO events what usually happened that a chapter had two or more plot teams that alternated events for a year. That way both group could play during the others event.
Reading Gary and Rob Kuntz accounts of Greyhawk, accounts of Blackmoor that seemed to be what happening for the most part. Multiple GMs using the same setting but each with their own plot.
Finally, yes it is prone to abuse for many obvious reason. In NERO and I assume for the early campaigns as well, it is mostly checked by peer pressure. It is embarrassing to be caught friendship gaming (i.e. running a event giving stuff away to your friends), and doubly so if you were caught using inside knowledge which was considered cheating. Most LARP groups and certainly the early campaign groups were small enough and the activity popular enough to make this effective in stopping people.
The biggest problems would come when both sides believe they are right. This often caused groups to split. With Tabletop RPGs is is very easy for new group to meet on a new night and run a new campaign so it doesn't surprise me that multiple GM, shared settings disappeared quickly.
However it made a comeback in the past decade with Living Campaigns where the figured out how to get around the issues of the past.