You see progress is important in a video game. If players feel that their time is not being rewarded with any real progress then they will not play, period. So what was happening before paragon levels was players were playing for days or even weeks in some cases without any upgrades, They did not get anything useful enough to sell so they could buy their upgrades on the gold auction house. So they felt their time was wasted, they were losing interest. So Blizz introduced paragon leveling.
This way if you have those days where you are not getting anything useful as far as an upgrade or something useful to sell. Now you get extra xp toward the next paragon level. Of course the problem then becomes what does a paragon level 100 do when they are farming and it has been weeks, maybe even a month since their last upgrade or really great drop that they sold. They must get pretty bored with the game. So some of them might take a little time off.