Does the continuous power-to-weight ratio of electric motors decrease with size?
Small hobby propellor motors have a high power to weight ratio because small motor and small propellors can easily operate at high RPMs, in the 10,000 RPM order of magnitude. The cited paper is about motors in the area of 2000 to 3000 RPM.

Motor weight and volume is somewhat proportional to torque and not so much related to power. A motor of a given size will provide the same torque over wide range of speeds. The higher the speed, the higher the power for the same size motor. The same thing is generally true for heat engines also.

See if the cited paper makes sense with that in mind.


  I still don't understand the connection of these 2 arguments WRT the NASA paper.


The paper is lengthly and complex. It cites several references to other papers. This forum is intended to deal only with relatively narrow questions. I only scanned the paper briefly.


  If heat engines also follow this trend, then why are people pursuing DEP all of a sudden?


Serious large electric aircraft design is a new field. We should expect to see a lot of approaches explored. There is significant history in determining optimum number if engines for aircraft as illustrated below.




  ... the continuous power/weight ratio of electric motors actually decreases with size...


Since power = torque X rotational speed, a power/weight ratio is only meaningful if either torque or speed is constant for a given comparison.

In all aspects of this question, the balance of system (BOS) is an important factor. The BOS includes the control and monitoring system, fuel storage and delivery system, lubrication system, cooling system, structural support and enclosure system and perhaps others. Some parts of these may be integral to the motor.