I have no experience with conducting or being conducted, but there are a few things that seem obvious to me; I might as well throw my hat into the ring.
I see several benefits to having the conductor also be a performer. One is cost. Paying one person is cheaper than paying two, even if you're paying the one extra for their dual role. This assumes everyone's being paid, of course.
I've also seen smaller groups with a conductor, and it seems somewhat odd. The conductor seems like a crutch in a way; 8 or so musicians should be able to play together without needing massive coordination. If there's a clear soloist providing the lead or something, that should be enough.
My final thought is that it allows the player to gain leadership experience. I've seen many school concerts where the conductor is a teacher and several times it seemed like they were just there to get their moment in front of everyone. I'd rather see them step back and provide a student with the opportunity to lead. This would probably be good experience for someone looking to seriously start a rock band and so on :P
The other answers have largely covered the benefits the other way, but I'd like to emphasize another: The conductor notionally has a different skillset from an instrumentalist. The training and knowhow required to lead musicians and look for that special sound and flavor to a piece is not something that can be developed by just playing an instrument, and splitting your time between both is sure to mean that you develop less than you could by just focusing on one of them.