and there's no reason that delegators with larger accounts ...

When you're framing this as a mass movement you should look at it from the perspective of where the masses are, i.e. small accounts. The implication of the way you've framed the whole endeavor is that this is a way for people to positively participate in the community.

I concluded that developers who abuse the delegation will be less likely to receive new delegations in the future, and they might even lose whatever delegations they receive. I think there's some natural oversight that will happen here.

Seems unlikely to me, like with witness votes I think people are unlikely to actively monitor what the people on the receiving end are doing. Without any kind of reset or decay I would expect most people to do a set-it-and-forget-it kind of thing.

Are delegation loops allowed, and if so, did the blockchain developers test out what happens with multiple layers of looping delegations?

I haven't looked at the code, but my first guess would be that delegations are limited by actually-owned SP, so there would be no loops, what has been delegated to you has no impact on what you can delegate to others.