I think arcade sticks are perfect for this purpose eheh
they are colourful and big so the kids like em
also theyre tough as nails so you dont have to worry too much about getting them damaged
I have been sitting my 16 month old daughter on my lap while I play Ikaruga using either my EX2(360) or Agetec(DC), and she seems to be understanding about moving the ship around lol, I dont think she understands the chains yet though