avrstudio has some simulation built in, that accepts "stimuli" files and does logging. I like avrstudio but it is windows only
It looks like the eclipse folks have a couple simulator options too.
But by the time it is all sorted, a $4 chip with custom testing application on it for testing on real hardware doesn't seem so bad. And it could be independant of the actual development environment (load latest test hex) so arduino might be a good choice actually, just for the test device.
Would the coders be willing to test on some inexpensive hardware before checking in? Would they be willing to write new tests when new code is written or bugs are found?