From my understanding he did indeed go quite mad and lived with that madness for at least a few decades, with it becoming more acute as time went on. Unfortunately the City of Greyhawk had to deal with the negative effects of his madness in those later years as well. Part of his madness was undoubtedly caused by his growing magical power or more specifically his research into magical spells, items, and locations that weren't necessarily meant for mortal beings. However, I think the biggest factor that led to his madness came directly from his time spent with the Lich Lyzandred the Mad.
Apparently the time he spent with Lyzandred drove him crazy and fueled the growing madness Zagig would live with for the rest of his life. This madness was unique because it didn't prevent him from becoming an even more powerful wizard, building more above and below Castle Greyhawk, and eventually becoming a demigod. However, the nature of his madness did make him more aloof and unstable and it clouded his (formally) rational decisions and leadership in the City of Greyhawk and across the Flaness.
I'm not sure how his madness changed or didn't as a result of him becoming a demigod. Although from references in several sources he continued to be very eccentric and at times mad even as a demigod. This is a very interesting topic and I'm sure many others will have more info.
Sources: City of Greyhawk boxed set, Greyhawk Ruins, Crypt of Lyzandred the Mad, Greyhawk: the Adventure Begins, Treasures of Greyhawk, and From the Ashes boxset.
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