I would say the benefits of 20" wheels would be:
1) Somewhat more comfortable ride.
2) Easier to find high quality tires (20" are commonly found on recumbents)
3) Easier to find emergency replacement tire at department store.
4) If you hit a pothole the 16" tire will drop that much furthur in increasing the probablility of damage.
5) Small wheels carry less inertia than larger wheels. It's hard enough with 20" wheels (I know, I used to ride a dual 20" recumbent) to keep up on the road. It will be that much harder with 16's.
6) The smaller the wheel the harder it will be to come up with a usefull gear range. Again, it's hard enough with 20" wheels.

There are good 16" tires available as a result of the recumbent trike market but in my experience they are generally mail order only and expensive. I suppose a folder with 16" wheels would fold more compactly. If you are seeking ultimate compactness in order to stowe a bike on a small aircraft or boat that might trump all of the benefits of a larger wheel. But overall I think the ride of a 20" wheel bike would be superior.

Willing to hear different from 16" advocates.

Brian Daniels
East Nassau NY