If I have a 720P camcorder to record 720P video, and encode the video in 1080P resolution with a video editing program like Sony Vegas, Windows Movie Maker, iMovie or Final Cut Pro would the video quality be worst or better video quality?
It will be the same, but will look worse on a 1080p screen. In other words, if you watch both videos side by side in a resolution ≤720p, they will look the same (although the 1080p may look slightly worse, since it will be re-encoded).
I also heard of upconverting DVD players which upconvert DVDs to 1080i which offer higher resolutions, but they are more blurry compared to Blu-ray at 1080P.