That depends on your definition of "better."
Were the citizens of smaller European medieval polities, usually centered around a large city and its satellites, generally better off than their counterparts in larger states?
By and large yes, they were. Since about 1994, the dominant school of thought in Economic History has attributed economic success to a region's institutions, and the strongest institutions were in the places with the strongest heritage harking back to the harsh, but fair, Roman justice system. Now, since arguments have been made that the Roman Empire was fundamentally a network of interconnected cities, it's easy to see why in the Roman heartland of north/central Italy cities and their citizens would do their utmost to preserve their rights and freedoms. These institutionalized rights and freedoms included the representation of the merchant/artisanal upper class in civic government, leading to a legal system favorable to economic development and fostering a relatively mobile society (the lines between a low-level member of the landed nobility and high-level merchant are indistinguishable in Italy by the eleventh century).
Other politically fragmented and heavily urbanized areas, like the Netherlands, developed a similar set of laws and institutions. The Netherlands come in a close second to Italy in economic development indices through the middle ages up until the early modern era, when the double whammy of the Italian Wars and the boom in atlantic trade sent the Netherlands on an unparalleled growth trajectory while the Italian states went into protracted stagnation. I guess you can say that because they were generally democratic, smaller european states were more successful in a strictly economic sense.
But keep in mind, being small isn't a necessary condition for a democratic legal system. The one big counterargument is England, where democratized form of government was forced through by the English nobility when sovereign's center of power was on the european continent. Indeed, the English nobility enjoyed a fairly high standard of living in spite of lower agricultural productivity levels and the general dreariness of England as a whole. Low population levels meant that middle class artisans could demand higher wages than on the continent; Britain, being an island, couldn't import more workers as easily. It's maritime traditions and comparative isolation from the tumultuous European continent made England a prime candidate to supplant the Dutch as the primary Atlantic superpower, as indeed they did after the anglo-Dutch wars. Following the eighteenth century, the English middle class' standard of living skyrocketed.
So this is a convenient segway into the next part: were smaller European polities, still centered around a large city and its satellites, generally better at protecting their sovereignty?
No, no they weren't. The sovereignty of small states were constantly under threat; the military history of Italian cities is as much a history of frantic defense against the Holy Roman Empire and the Kingdom of France as it is a history of inter-urban confrontations.
Setting aside the uncharacteristically large Papal States and Kingdom of Naples (the latter of which became a Spanish client-state anyway) the Duchy of Milan very easily lost its sovereignty in 1499, and from that moment was contested between France and Spain with no say in the matter. The Republic of Venice does slightly better, but fundamentally bankrupts itself to survive following the War of the League of Cambrai in 1508 and it never recovers; this catastrophic event for the Republic is a hiccup in the histories of France, Spain and Austria. The Duchy of Prama voluntarily attaches itself to the Spanish Empire, as does the Republic of Genoa, both states compromising sovereignty for stability. The Duchy of Tuscany was best Italian statelet at walking the line between the great states of Europe, however Tuscany for its own reasons was less economically developed (Tuscany was more pastoral and less intensively agricultural than the Po floodplain) and Milan was at the center of two direct routes from the mediterranean into Europe (Genoa-Milan-Val Telline into Germany, and Genoa-Milan-Val D'Aosta into Central France) as was Venice (Venice over the Brenner into Germany) while the Florentine economy was more isolated, leading to fewer international ties which allowed the state to proclaim neutrality throughout the Italian wars.
What the small Italian states lacked, as the Dutch would one hundred years later, were economies of scale in all things. Because they had small internal markets their middle class depended on international trade, which was susceptible to disruption due to war. After the Kingdom of France emerged surprised to find itself a united and centralized country after the Hundred Years War, the Kings of France could count large land armies greater than anything their cousins in Italy could muster. Same with the Austrian Empire, which encompassed the Kingdoms of Bohemia and Hungary. Atlantic trade also greatly benefitted the Spanish state in spite of consistent economic underdevelopment, consequentially creating a hundred-and-fifty-year period in which no other European country is able to project power the way Spain could.