I certainly understand the OP and issues with the AI low morale and caving in and surrender. This can have serious consequences on a game and obviously need to be looked at from a balance stand point, that much is obvious.
I also think that percentage modifiers on morale need to be applied before the penalties of LEP, this would reduce the problem both the player and the AI are faced with and would make larger map scale better since you could more easily offset the penalty with relics and other percentage modifiers.
Overall I otherwise like the flat penalty better than the percentage one since if scale a bit better. Although I would have liked a better LEP system altogether not directly tied to just the morale of the empire or at least not in this way.
Currently of you have a 100% global bonus on approval then each 10 planets you have basically means 4 billion less potential population on each planet. With a zero global bonus it is 2 billion less potential people on a planet. These numbers will just grow the more planets you have and with no structures to specifically counteract the penalty in a big way there simply is no real incentive to build a large empire and will make both influential and conquest victories pretty hard to obtain in really large maps.
Here is a rather rudimentary numbers experiment...
Lets assume that we can keep planets at 15 population on planets at ten planets and that we have a 50% global percentage boost and 100 approval, just to start somewhere. In this experiment I just reduce the population to keep morale at 100%, not realistic but just to have some numbers to show.
At 10 planets we have a total RAW production output of
(5+(15^0.7*2))*10*1.25 = 229 production points
At 20 planets we have a total RAW production output of
(5+(12^0.7*2))*20*1.25 = 409 production points
At 30 planets we have a total RAW production output of
(5+(9^0.7*2))*30*1.25 = 536 production points
At 40 planets we have a total RAW production output of
(5+(6^0.7*2))*40*1.25 = 600 production points
At 50 planets we have a total RAW production output of
(5+(3^0.7*2))*50*1.25 = 582 production points
Soo... eventually you end up at a point where it is no longer relevant to grow considering the resources it takes to invest in colonizing new worlds. This is in itself not a bad mechanic, but it may have some bizarre side effect as above where an empire just tank... will the AI even stop to think about if expanding actually is a good idea anymore?