It is used to determine when resources are downloaded by the player.

If it is set to 0, everything will be downloaded by the player as needed. For instance, it won't download the attack wav until you are about to hear it, and it won't download some enemy icon until you see it.

At 1, everything compiled into the resource file is downloaded when the player first enters the game. All at login, so the player does not need to keep downloading things throughout the game.

At 2, it downloads everything in the resource file, that is everything that using 1 would have made them download but also everything that has been stashed in the resource file by players since the world was started up (such as when a player uploads and plays a song).

If the game is small, leaving it set at the default of 1 is what you probably want. You usually only want to set it to 0 if there are a ton of tiny files which would make the player have to sit for half an hour at login when they could be going through the game immediately but downloading everything along the way. Having to download everything along the way will only cause a bit of lag the first time a player sees anything. The first time the player sees an orc, it might lag for a split second while downloading, but every time after that it will be fine.

Well, it would lag worse for them during the game.