Diablo – Are there any game mechanics that affect gem drop quality

I have personally seen the stats showing diminishing returns.. at about 40% each point you put on shows up less points when you look at your stats. at 50% I put on a 7% item and only got 2% I hope this helps..

THIS ANSWER IS UPDATED AS OF PATCH 2.0/REAPER OF SOULS

All previous answers assumed an environment where the Auction House was a possibility for gem procurement. This is no longer the case in patch 2.0, and in order to get gems above the "Imperial" level, you must pay Covetous Shen to combine gems, as well as provide a few materials beyond simply money and gems at the highest levels.

So, is it worth it to combine gems?

YES (for Marquise and up).

In Patch 2.0, it is possible for Marquise gems to drop from level 61 and higher monsters. It is also possible for Imperial quality gems to drop from level 61 and higher monsters on Master difficulty and higher.

The gap between a Marquise gem and an Imperial gem is substantial, but gets even higher as you go further. Let's take an example of an Emerald placed in your chestpiece...

• Marquise: +62 Dexterity
• Imperial: +100 Dexterity
• Flawless Imperial: +160 Dexterity
• Royal: +220 Dexterity
• Flawless Royal: +280 Dexterity

So, given that you can achieve a boost of +180 to a particular stat by combining gems over what you can get just from drops, it is absolutely worth it.

Below Marquise you will have to spend to upgrade Covetous Shen and then further spend to update the gems. If you can afford it, go ahead. More likely by the time you go through the effort you will either outgrow the piece of equipment or drop higher level gems. It's really not worth the effort though.