My understanding is that the pitch of the prop is more important than the
diameter (within reason), as long as it fits. A larger diameter with the
correct pitch equals more overall efficiency.


And more drag, as well. Assuming equal pitch, the larger diameter prop
would be more appropriate for situations that require more low rpm
efficiency and torque than high rpm speed, such as in an industrial work
boat, slow cruiser, or trawler . The smaller diameter prop would be more
appropriate for a high speed application such as a performance boat. A
medium sized diameter would be a compromise of the two. A good example
would be MerCruiser's line of outdrives. The Bravo II swings a relatively
large prop and is typically used on industrial boats and some slower
cruisers. The Bravo I or Alpha dives use a much smaller diameter prop and
is used on sport boats, faster cruisers, or runabouts. The Bravo III drive
uses props about the same size as the Bravo I or Alpha, but gains efficiency
of blade area and other advantages by having twin counter-rotating props in
line.

Theory aside, there is most likely very little leeway in the choice of prop
diameter for a given application due to clearance, fit, and parts
availability for the given drive system.