It is not worth it. If you have the wrong holding type you take about 25% of the base income as income. If you give it to a vasall you will get at least 45/50% or more percent of the base income. So holding the wrong holding type is almost never worth it. Not to mention.

You can't play as a theocracy, so it only makes sense to talk about the benefits of having theocratic vassals. The only benefit, unless you happen to have vassalized the pope himself, is that you can charge them higher tax rates. But if that's the goal, it's better to have republican vassals since republics make more money. To create republics, you first give someone a city, then give them the capital barony in that county (exactly like prince-bishops, but with cities instead of temples).

So I was playing the demo earlier and an 'alert button' popped up saying that a few of my provinces were the wrong type of holding in my demesne. I was playing as Matilda. The three holdings in question were 2 cities and a bishopric that I had recently conqured. As far as I could tell, there were no negative aspect to Matilda holding the titles of 'count' for those provinces, but the alert button was there for a reason. I ended up granting those titles to some members in my court and the button went away. I am wondering why exactly Matilda (or any noble) is restricted to only holding provinces where the capital is a castle/barony without getting that alert button?

As I understand it, there are negative modifiers to the income from wrong-type provinces. Videos like this how to download cs 1.6 for mac. So a vassal of the correct type will make more money out of it than you will.However I'm pretty positive that you will make more money out of it directly than you will out of the taxes a vassal would pay you, so I think it breaks down like this: if you are below your demesne limit, it is best to keep hold of every barony regardless of type. However once you get over the cap, give away wrong-type baronies first, since you do better out of castles than you do out of cities or bishoprics.