It was the poem Ojos negros, which appeared in La tribuna de los niños, a section of the magazine Iniciación published by the Society of Literary Studies of the Lojano School.

[13] In 1921, he obtained second prize (an honorable mention) at the Floral Games that critic Benjamín Carrión had brought from the capital to the city of Loja.

Pablo won the award for the short story El huerfanito which, according to Carrión, who presided over the jury that awarded the prize, lacked proper syntaxis but was a sort of "intentional nonsense": Entre descalificar al audaz que tomaba el pelo al jurado o premiarlo por curiosidad, optamos por lo último.

During his stay in Quito, he actively participated in the political and social unrest related to the Julian Revolution of 1925, led by a group of young officers of the Ecuadorian Army with progressive tendencies.

Palacio, along with other artists of his generation, began to question the social and aesthetic values imposed by the elites on the cultural and literary circles of the time, both in Quito and in the rest of the country.

[16][17] In February 1926, he published the play Comedia inmortal in Efigie magazine, although his contemporaries did not really appreciate his talent as a playwright, only as a novelist, short story writer, and sharp-witted critic.

According to historian, critic, and linguist Hernán Rodríguez Castelo [es], Comedia inmortal is a "strange" play, difficult to categorize, since it cannot be compared to anything else that existed at the time.

Moreover, according to writer and journalist Alejandro Carrión Aguirre, Palacio's first short story collection sparked quite a scandal, since never before had stories of that nature been written, in a manner that was: irritante, hiriente [...] con un conocimiento de la vida que se parecía al conocimiento que tiene el cirujano de la carne viviente: cortante, ensangrentado.

When he returned, he was tanned and seemingly brimming with health, but strange things started to happen to him that perplexed his friends: mental fugues, sudden amnesia, forgetting words in the middle of a sentence, staying distracted for long periods of time, absences in which he seemed out of touch with reality, nervousness, unprovoked irritability, constant restlessness, all of that was out of character for him.

For some, like Hernán Rodríguez Castelo [es], the cause of Palacio's progressive madness could have been a result of the injuries he received as a child when he fell in the stream at El Pedestal.