People go to Paleo largely for the beach and the scenery, and there's no denying that the scenery is absolutely out of this world. Having said that, Kassiopi is also set on a fantastic piece of coastline overlooking Albania, with some great places to visit close by.
Both are within easy reach of Corfu Town if you want to hire a car, although it's Kassiopi again if you fancy a boat trip to the capital.
My recommendation would be stay in Kassiopi and visit Paleo for the day.
I go along with Rich c's recommendation that you stay in Kassiopi. We were there in May and it was great. There's no denying that Paleokastritsa is wonderful but the resort is much smaller and most of the accomodation is set on the hill. You'll definitely find more to do in Kassiopi. The boat trip from the harbour to Corfu town is well worth doing. Good luck with your choice.
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