This is an article that was written in relations to your standard RPG, but I think brings some interesting points to the table about items.

http://www.enworld.org/forum/content.php...

That was an interesting article. I think it's something a lot of game designers either stumble upon or intuitively understand without really analyzing it.

TL;DR version: You need a balance between the power that comes from items, and that which comes naturally from the character.