is there an adequate number of levels of categorical variables?
No, there's no &quot;adequate&quot; number of levels for a categorical variable.
The choice to simplify the data by discarding some levels (for example by using a default category, as you propose) depends on what the goal is (and also number of instances, etc.). Very often this choice is made experimentally, that is by trying different methods (e.g. different thresholds) and observing which one gives the best performance: here you could do a program which tries the different proportions as threshold, then train and test the resulting model for every value, and finally plot the performance for every value.