There are one or two engine limitations that happened to be compatible with 800x600 that would not be compatible with higher resolutions--all fixable--but mostly it's a principled decision, e.g.

• The bigger the game window, the slower it is to draw, so the lower your FPS.
• The bigger the game window, the more of the level you can see around you at any given time, which has massive effects on gameplay, especially multiplayer gameplay. If different people have different resolutions, whoever has the bigger window is going to be able to see farther ahead of them, gaining a huge competitive advantage.
• Jazz's sprites get comparatively tinier and tinier as the window gets bigger. Besides this being less attractive, psychologically it feels like Jazz runs slower when he takes up less of the window, you move across a smaller percentage of the screen in a constant period of time.
• All existing levels are designed for existing maximum resolutions. There are many levels designed for 640x480 that look bad when played at 800x600, usually because one or more of their parallax background layers cut off at the bottom. Increasing the maximum resolution again would give us another round of the same problem.
• In local single player, objects are activated and deactivated based on how close they are to the local player. Increasing the maximum resolution much more would cause them to visibly activate and deactivate at the edges of the window. We can't change that distance because many levels rely on it for puzzles and such.

Not related to the main thrust of this thread, but we do have some of the source code, though unfortunately none of the sections related to window size.