This is an old question, but after 13 years, how Google Drive permission propagation works is still confusing.
One of the relatively recent changes, announced in 2022 that will impact how nested folders and the sharing settings of folder contents is that Google Drive used to allow having files and folders in multiple locations. This is being replaced by file and folder shortcuts.
Depending on your mindset, you might find the docs with a specific target audience than those for a different one.
From Simplifying Google Drive’s folder structure and sharing models
Beginning Sept. 30, 2020, it will no longer be possible to place an item in multiple folders;
After Sept. 30, 2020, we will begin migrating all items in Drive to a one-parent state. Any other parent-child relationships will become shortcuts in the former parent folders. We will adaptively select the most suitable parent to keep, based on the hierarchy's properties.
On More details on migration of existing multiple-location Drive files to shortcuts and other improvements for shortcuts Tuesday, December 7, 2021, Google announced that the migration from multi-location to file and folder shortcuts would happen in 2022 for Google Workspaces account and consumer accounts.