Hmm... I haven't really seen many of these "dwarf" wolves, but they are out there. Maybe the people playing the tiny wolves prefer being tiny, I don't know. I myself like playing smaller characters, and that's why I often times play as small animals; foxes, cats, weasles, etc.
If they want to play as small wolves, I say let them. It's their character, therefore they can make it any size they want to. Who are we to tell them they shouldn't do that?