Difficulty settings are in Galciv3AIdefs.xml.
Increasing bonuses doesn't really help much, due to so many of the AI's problems being centered around the scripted behaviour - no amount of increased production makes up for the diplomatic AI's appalling turn 30-150 strategy, for example, where it spends just 1% of total production on military output. And since the scripts are written for normal, the AI won't properly capitalize on many of the advantages it's given - enhancing morale, for example, won't cause the AI to stop building morale buildings. Enhancing production to the point where it can manufacture anything in one turn won't result in the AI re-purposing spare production to research, or cause it to adjust the military slider to maximize output.
This is largely why difficulty is pretty meaningless atm; the AI cannot use the advantages effectively and so the higher the bonuses, the more is simply burned off on projects or stuck in overflow. It's more constructive to play on normal and edit strategies, build queues and generic behaviour than to waste time mucking around with increasing the handicap. The alternative is to code AI strategies, governors and blueprints that rely on high-level handicaps, which could be reasonably effective but will certainly collapse instantly without them.
