In ACKS Core Rules, there is seemingly little incentive for a lord to parcel out a domain of less than 24 hexes. It's only when you add Domains at War into play that you see the reasoning - individual domains are occupied and concquered individually. If you have one big domain, an invading army has occupied it the moment they enter it, and conquered it the moment they've taken the stronghold. If you have one "hub" domain surrounded by a "wheel" of vassals, then your "hub" is not occupied by an enemy that invades a vassal's domain, and your "hub" is not conquered if you lose one or more vassal strongholds. Since occupation and conquest can cause disastrous morale problems, looting, pillaging, and more, a liege-and-vassal arrangement makes domains much, much more resilient.
Historically speaking, feudal-arrangements tended to emerge in regions that were subject to constant enemy attack, whether that was Arab invasions of the Byzantime themes, Viking raids on Frankish shores, etc.
Beyond that, I will offer an incredibly over-simplified answer to a question that perennially rages in history circles ("why feudalism") with some arguing feudalism is not even real.
In pre-modern settings, the wealth of the land was not highly portable. Extracting wealth from the peasantry was complex. Government had to be local, because there were no immediate long-distance methods of communication, no digital means of transfering wealth, and so on. So if you had large land holdings, you had to have subordinates. Your choice was to rule them via stewards (employees) or to parcel them out to vassals.
A steward assigned to manage land in the short-term was incentivized to exhaust the soil and the peasants to his own enrichment. This works to the detriment of the ruler. The steward is also incentivized to scheme for how he might become a landowner, which reduces his loyalty.
A lord given ownership of land, that he will pass to his heirs, is incentivized to keep the soil and the peasants flourishing. However, the lord is still incentivized to figure out how to keep the wealth of the land to himself as much as possible and pass as little as possible to his liege. The feudal solution to this is to require that the vassal lords pay their liege in something other than land-products - for instance, in soldiers. The liege lord can then say "I don't care how you manage your land, provided you send me 100 soldiers per year. But if there's less than 100 soldiers, there's going to be problems."