Therefore the proper way to balance LEP then is to INCREASE the malus, to force you to pick approval buildings over that extra factory.
Not really. The problem is, you're still gonna hit the capping point sooner or later, and when you do the approval buildings become useless, so you may as well not waste time building them in the first place (besides which, an extra farm or two is almost always a better choice anyway). It's a mechanic which basically breaks conquest games on maps with over 100 planets, and it will continue to break them regardless of where you set the malus.
Much as I hate to agree with Marigoldran (at least until he stops endlessly producing extra threads to say exactly the same thing), he's right.
You get -0.2 approval per world, right? And only +2 approval from the basic entertainment center. So if you have 40 worlds, you have -8 approval for starters. You need to build 3 entertainment centers just to get any benefit at all (+1, which you then have to divide by the colony's population); you need 5 to hit 100% approval once the colony has filled the colony capital pop limit. That cancels out the -25% production and gives you the maximum +25%... But so does just building 2 of the correct production type for whatever you're specializing the world in. That's 2/5th of the land cost for the same result - and that's if you don't build any farms. Every farm you build gives an eventual 40% bonus to production compared to the base colony, and so is much more effective.
Run the numbers. You have 40 worlds, I have 40 worlds.
I colonize a planet and build no approval buildings. I add 5 farms into the empty slots. I have 15 population with a -25% penalty to production, giving me 11.25 population's worth of output.
You colonize the planet and build 5 approval buildings. You have 5 population with a 25% bonus to production, giving you 6.25 population's worth of output.
This carries on all the way up the scale til you hit the 30b population cap on a planet. You're better off just getting farms.
You need an extra approval building for every single farm on a planet, and an extra approval building for every 10 planets you have, too (which is yet another example of why wide empires are better than tall ones). This means that approval buildings actually lose value in relation to other buildings as the empire expands. Once games go over about 20 planets per player, approval buildings have lost so much value that that you should never buy them because you can gain the same bonus much, much cheaper elsewhere.
This is an unavoidable problem with the mechanic, and requires an additional punitive external mechanic to deal with it (i.e., worlds rebelling, a research cost increase, maintenance penalties). And once you have an additional mechanic for that... well, why bother with using approval? You already have something to punish over-expansion, so what's the point in dragging approval into it on top?