There's a couple questions here.
One, is there anything wrong with game sharing? I say unequivocally no. These are the license terms PSN games are sold under. They permit use on five systems and don't place even unenforceable restrictions on which systems those may be. This is the equivalent of using the spawn feature from Starcraft or something -- yes, it can create situations where someone doesn't need to buy a game they otherwise might have, but it does so when people use a built-in feature in a way that was, if not intended, at least anticipated. End users should never feel compelled to watch out for the publishers' interests in this kind of scenario; pay full price if you want, to support the developer (or get five installs all to yourself) but not because you think sharing is inherently wrong.
The second is whether desigining their system this way has increased or decreased sales overall. This one's pretty hard to figure out since we don't even know what PSN sales in general look like, though the little information we have suggests that only a small portion of PSN titles purchased are being shared in the first place. At that point you just have the question of whether the network-advertising effect (where people go spend more money on things related to stuff they liked when they got it for free) outdoes the cheapskate effect. My own guess is that they'd probably more or less even out, but we'd need much more detailed numbers to even start to get a factual answer.
It is, at least, pretty clear that a) devs can have very successful releases on PSN and b) Sony has made no serious effort to rework their game sharing policy, so I certainly don't think there's much chance this is some sort of epidemic destroying the platform from inside.