DPI makes no difference; it's utterly meaningless in video. Don't even think about it.
The optimum size would be however large the PIP frame ends up being in your project. Vegas isn't fantastic at resizing, so you might want to try resizing the image in a photo editor first before importing it into Vegas.
And yes, do try Pan/Crop. It's much better at resizing than Track Motion.
How are you looking at the result?
Making the image smaller on the screen should make it look better however if you're not rendering and previewing at Best it will look worse.