It actually looks good on Luigi to me. Another thing is the shading on that sprite. To me, the head looks flat on both big and small forms of each character. The only shading is coloring a certain part of the sprite differently; the entire ear being colored differently, or the nose, for example, or the front part of the hat. Also, the dark blue shade blends too much with the shade used for the overall straps, making the straps hard to see. Unless the overall legs are supposed to look baggy, their leg shapes are pretty un-natural, their legs curving inward at the bottom(on their respective big counterparts). The shading makes it seem like their bellies are sticking out a bit, especially as opposed to their legs which have no shading but probably should, being in the lightsource. Also, the shading on the hat makes it look blocky, the front facing diagonally forward - which is obviously not the angle you're going for. As stated before, due to the shading, their heads look entirely flat(even the ears and nose, due to the fact that even they have no shading - they're simply colored lighter).
EDIT: Also, there is no reason the overall straps should be colored in a darker shade than the overalls(at least at the bottom). If anything, they should be lighter, as the straps must be above the overalls themselves.
EDIT: Also, there is no reason the overall straps should be colored in a darker shade than the overalls(at least at the bottom). If anything, they should be lighter, as the straps must be above the overalls themselves.