It increases the pixel density, making UI elements look smaller. It gives an illusion of having a larger screen. I don't think there's a way to get the current pixel density being used without having terminal access though (jailbreak) so who knows what it gets set to.
EDIT: Seems like it actually scales the resolution. With it on it reports a resolution of 2778x1940, vs the native 2,388 x 1,668 (an increase of 16.31%). Both are a ratio of 1.43.