Cool.  That's what I think too, though KSB95 claim somehow that dshift/dtheta ~ r0 theta^2 / 6 (eqn. C4); I think this must be an error.

As for the overall effect, I can see that extended sources will get slightly sheared by the shift(theta) transformation (and presumably unsheared when fitting the WCS solution).  I'm still not completely clear about what happens (or doesn't happen) to the PSF though.  I.e., does the shift(theta) transformation apply to the image before or after convolution with the PSF?  Maybe it doesn't matter, since what ever happens to the stellar PSF also happens to the galactic PSF, and the difference in this effect between the two, as you state, is negligible.