Decomposition facilitates the recycling of often limiting resources, which may promote plant productivity responses to diversity, i.e. overyielding. However, the direct relationship between decomposition and overyielding remains underexplored in grassland diversity manipulations. We test whether local adaptation of microbes, i.e. home-field advantage (HFA), N-priming from plant inputs, or precipitation drive decomposition and whether decomposition generates overyielding in an established rainfall and diversity manipulation. Precipitation was a strong, independent driver of decomposition. Grass diversity stimulates decomposition, which decreased with phylogenetic dissimilarity from and densities of the ‘home’ species, providing strong evidence HFA drives decomposition through closely related neighbors, rather than conspecifics. Legumes stimulate decomposition of litter carbon, suggesting N-priming stimulates decomposition. However, decomposition and overyielding were unrelated in legume communities and positively related in grass communities. Combined this suggest diversity stimulates decomposition through multiple mechanisms, but only HFA generates overyielding through resource recycling, linking diversity with ecosystem processes directly facilitating overyielding.