I would have to say that this nest theory is but one way that the number of cases could decrease. I would suspect that similarity of case endings could cause separate cases to conflate formally. To some extent this is seen in classical Latin where, e.g., the first declension singular genitive and dative or second declension singular dative and ablative are formally identical. We know that the instrumental conflated with the ablative in all declensions in Latin as well as the locative falling into the ablative, as already noted.

I've also heard the theory that the prepositions were originally connected with the verb, as the separable and inseparable prefixes of German or the particle of phrasal verbs of English. Latin even has inseparable prefixes that generally look an awful lot like preposistions.