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Way too many people saying way too many things like how non-rusted rotors and hubs work better.
All placebo.. we have never been told or shown otherwise.
Open is a cheap option that will let the wheel with the least grip get all the power, this results in a one-tire burnout. If you have full grip, it lets the two drive wheels turn at different rates, so you can turn corners without tire squeal. It's good enough if you drive like a normal person.
Welded diffs transfer equal amounts of power to both wheels at all times, no matter what. One tire will start squealing in a corner with little power.
LSD splits the difference between the two. It acts kind of like an open diff, letting both wheels turn at different rates, but when one tire starts to squeal, power gets transferred to the wheel with more grip. It's meant for racing, when you're going to hit corners hard and need maximum power.
There's a lot of adjustments you can make to a Limited-Slip Differential and I never checked if the game let you.
In short:
Use Open for a "normal" car for "normal" things.
Welded for drifting, or when you want to go offroad and you want a cheap grip improver.
LSD for racing.