You suffer a penalty when you are wearing or wielding an item that is a higher level than you in “Minions of Mirth”. Special items don't proc and stats are limited. Weapon damage, delay and even range suffer a penalty. There does't seem to be an easy way to figure out how stats are limited.
I thought if I plotted the the percentage penalty, damage and delay penalties I might be able to guess how they are computed. It didn't work. I like math, but I don't know how to find the formula from the data.
Since the game goes up to level 100, I figured a level 100 item would provide the best data. The highest level item you can craft is level 95. So I used a masterwork tillium dagger for the data. I enchanted a dagger so it was level 100 as well.
A masterwork tillium dagger has a damage/delay of 16/2. I gathered the data for the damage and delay for both the level 95 dagger and the level 100 enchanted dagger in LibreOffice and plotted the data for the level 100 enchanated masterwork tillium dagger. See the plots below.
mom-penalty.svg
mom-percentage.svg
mom-damage.svg
mom-delay.svg