It occurs to me that, properly implemented, such a sliding scale of dwarven society would be like Spore, but done right.
I also like the idea of this scale being tied to the size of your settlement; when the liaison offers to promote your settlement to a barony/county/duchy, there would be a little blurb enumerating the exact changes this would make to your fortress. So to use NW Kohaku's chart there, a barony would signify official civilization interference in military matters, meaning that your fortress is involved in larger conflicts and may draw attacks from civs who are not necessarily immediate neighbors. A county would be the point where your fortress is a significant player in civilization economics, and is the point where more advanced economic systems, class systems, and diplomatic systems would kick in. Duchy would be where intra-civ politics become important, with political intrigue, social unrest and internal factions coming to the forefront. And of course, being upgraded to Mountainhome puts you at the helm of the entire civ, with all the internal and external policy decisions that implies.
Each level involves different levels of individual freedoms for the citizens- in an outpost or barony, everyone has to do exactly as the leader mandates in order to ensure the survival of the settlement. By the time you are in a county, however, dwarves do not want to work 18 hour days and want leisure time to pursue their hobbies and social lives, which is now possible due to the many unemployed dwarves who are more than ready to pitch in and take up the slack. This is the point at which your fortress becomes less of, well, a fortress and more of a city. There is more of a "me first" mentality shift as dwarves resent infringements upon their liberties. The extra socializing leads directly to the formation of political parties, factions, and especially a unique culture. You also see the rise of a middle class of legendary artisans, elite warriors and the newly forming service industry.
As the city elevates to a duchy the settlement is a prominent player in the politics of the civ, which attracts a growing court of nobles, guildmasters, foreign dignitaries, and other persons of interest. Not just your resident nobility, but also the barons and counts of neighboring territories will drop in to pay their respects, ask for favors, act in the best interest of their settlement (or not) and generally try to advance their position in the civ. All of these people have their own needs and wants, and their own agendas which may have far-reaching consequences for the civ as a whole. Barons who become discontented with their treatment may rebel, or defect to foreign civs. Slighted diplomats may make trading more difficult, or even close the borders or declare war. Other dukes may try to kill you- depending on the central power of the King they may even fight you to take some of your lands away. And once you are a Mountainhome all of this political wrangling and infighting is happening in your foyer all the time!
Naturally, a player can refuse an elevation in rank if they don't want (or are not yet ready) to deal with all of that. I also foresee an option whereby a ruler can declare martial law in order to force dwarves to work as if they were still in a barony. This would cause an unhappy thought in dwarves accustomed to greater freedom, but it would allow players to handle emergency situations.
If this is the route that Toady takes, it would also be interesting to see how influential counties/duchies/monarchs are within your settlement even while you are still a barony. Will they call upon you for levies in times of war, or demand tribute? Will you be able to call in the other half of the feudal agreement and send your baron or expedition leader off to secure Royal Reinforcements to help stave off enemy incursions? Will there be forms of government other than feudalism- perhaps in the Great Dwarven Republic being a duchy grants you a vote in civ policies? That is still quite a ways off, but its fun to dream.