Yes Jacques this is a very good point. If YC is perceived to be a total lottery then nobody with any talent will bother applying.
Personally I think this problem is best solved by making the selection criteria narrower. Rather than expanding, YC should be narrowing its focus. Of course this requires that they narrow to the right area which is very hard problem.
People continue to apply to Harvard. The problem YC has will be similar. At some point the thing changes from being a thing that improves its students to a credential or at least a marker. Once you make that transition, smaller size is needed to maintain the perceived value of the marker
Harvard has an self-described problem where a large percentage of the students they would admit don't apply (particular those from low income backgrounds) because they think they won't get in. Sure YC will keep its pipeline full, but if it is worried about getting the best then it needs to adjust what it is doing.
Personally I think this problem is best solved by making the selection criteria narrower. Rather than expanding, YC should be narrowing its focus. Of course this requires that they narrow to the right area which is very hard problem.