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2. Devon would be a county-level vassal-republic, it wont turn into a merchant-republic. Merchant-republics afaik never have vassal-merchant-republics, even if the vassal-republic is duke level.
3. You wont loose much income, since a single count-vassal doesnt provide much wealth, you'd get a little less troops, but as long as you aren't pretty small (lets say only being King of Wales) it shouldn't be significant. On the other hand the merchant-republic doesnt have a -25 opinion modifier against you for holding one of its dejure vassals, making it easier to keep him out of negative opinion (wich would impact your income from him) and keeping his happiness high makes it easier to keep him out of factions, in wich he could become a really dangerous factor under a weak ruler due to his deep pokets that might pay for quite some mercenaries.
Keeping the county would basically assure a fixed -45 from that republic (desires county + wrong government).
4. Even worse then 3 since you invite all that trouble for the measly income and troops of a barony instead of a county.
so the question boils down to how to give it to him - as his personal holding, as a republic vassal or as a feudal vassal.
if you give it to the doge as personal holding, the doge will be more powerful, pay more taxes and provide more levies. if another patrician family becomes doge later on, i think the 2nd county will actually remain in the possession of the original family. so the new doge would have cornwall and he'd have the republic of devon below him, run by a vassal patrician.
if you give the title to a random mayor or baron and then transfer vassalage to the republic, the doge gets less out of this land since he doesn't control it directly and only gets a smaller fraction of the tax/levies.
i wouldn't bother revoking anything from the doge. not worth the effort at all. you'll just piss them off for no reason. let them have a few castles or whatever. if they can't hold the titles due to their own demesne limit, they'll hand them out on their own. if they can hold them - good. more taxes and troops for you.
you're overthinking it, basically. cornwall is a ♥♥♥♥♥♥ 2 county duchy. it will never be strong enough to pose a threat to the king of england or whatever. just give them the 2 counties so they don't annoy you with "desires control of X" penalties and forget about them.
Unless you only have a small realm (like the Kingdom of Wales), I would grant your new MR vassal both counties in the Duchy of Cornwall. If you are the King of Ireland or England (or an Emperor) have a two-county MR won't be much more powerful than a single county MR, and you avoid all the opinion penalties mentioned above. So basically, situation #5.
If your vassal Doge granted the 2nd county in Cornwall to his own vassal, that vassal wouldn't be a MR. His vassal would either be feudal or a "regular" republic (like the vanilla mayors are). Either way, I doubt this would happen, since he would probably just keep the 2nd county himself, as even a unmarried duke with zero stewardship can own at least 3 holdings.
I had a couple different games as the King of Ireland with a vassal MR in the Isle of Mann. It is a lot of fun watching your vassal MR cover the North Sea with trade posts, and give you lots of juicy taxes. Just do whatever you can to keep your vassal Doge happy, as he will become difficult to bribe given his large income, and he will quickly get the "powerful vassal" tag (if you have Conclave) requiring a permanent position on your council. I liked making the Doge my Hermetic apprentice, as that kept him happy without requiring huge bribes on my part.
Good luck with your experiment.
I've been playing Italy lately, so I've had a chance to play around with managing several merchant republics, both independent and my own vassals.
While they're tempting vassals because they're rich and relatively weak, their votes are expensive or downright impossible to buy and they change leaders often, so you can't count on the vote not swinging the next year. Their counties are always going to be more valubale if you hold them yourself, and with enough money you can just buy your way to victory.
In my current game; I've made Genoa my captial - it makes a disgusting amount of money when maxed out on cities, I actually lowered city taxes because I was making more money than I knew what to do with. I overthrew the independent republics of Pisa and Venice and installed puppet doges. They perform well enough and I can easily kick them out if I need to, but I feel like their counties would be more useful if I held them myself.
I'm not sure how I managed to steal Genoa, but I haven't been able to do the same with Pisa and Venice - they seem to be stuck as city holdings and not castles, so I can't hold them without penalties.