To the extent that it takes time, that's time in the real world, not necessarily a lot of time in the gameworld.Out of curiosity, is that even possible? By any interpretation rich character development takes time. It's a matter of roleplaying, and roleplaying little things.
And both of these seem orthogonal to the rate of XP acquisition.
"Little things" does seem more relevant, but I'm not sure that little things are especially important to characterisation. In a fantasy RPG, I think character can be built around big things.
The PCs in my games often have character, but this doesn't generally emerge out of campfire conversation, haggling, or tourism. Discussions with friends and enemies are important, but these can (and do) happen in the dramatic moments in which XP are earned.
Well, if the dinner party is a prelude to Orcus turning up, the purpose of the level would be to make the evening with Orcus mechanically playable.I suppose you could hand out another level after every good dinner party, but I'm not sure what purpose it would serve, or even what it would mean.
More generally, in D&D increases in level have generally increased the political/cosmological/territorial scope of play, and this can be as relevant to a high as a low characterisation game.