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Does the AI actually give out duke/count titles to the player? I haven't played a lot of vassals, so I haven't seen it happen so far.

I think the AI will grant you a ducal title if you hold all provinces belonging to that duke title, or if you are the only vassal in that area (f.x. King holds the other title(s)).

F.x. if you start the game as count of Lübeck and pledge to Denmark, you will eventually get the Duke of Holstein title, as the King holds the rest of the provinces in that area.