I guess the fact the event only takes 3 days means it could increase to 16 teams but that would be more than the other team events at the Olympics.
Soccer, hockey and basketball are all 12 team events.
I can't find it, but I did read an article a while ago that suggested the IOC offered World Rugby a 16 team tournament, but they turned it down to keep in line with the other team sports and to keep the quality high. Given that there's been an hour break between each session so far, there's no additional time required.
Add on the fact that all the play can be done in 6 days regardless of 12 or 16 (with Hockey and Soccer likely to require more), if it's possible, I reckon it would be good for the sport. On top of that, the next bidders are: Rome, Paris, Budapest and Los Angeles, where 2 of the host countries are on the circuit, and a 3rd is an established rugby nation.
All moot though. 12 teams is good, but without the same constraints re time that other sports have, 16 should be feasible.