There is a very strong case for tight-fitting clothes on a road bike:
- Wasps (I'm listing the reason that firmly converted me first.) A wasp entered my shirt while driving, and I momentarily lost control of the car from agony at the moment it stung me. A wasp sting on a bike would be a rather dangerous event.
- Crawling sweat On climbs or when the wind is so stale it doesn't evaporate one's sweat fast enough, cycling in street or baggy clothing results in the creepy feeling of drops of sweat crawling on one's back, chest, and under one's arms. Tight special fabrics quickly wick sweat, spread it to a larger area, and evaporate it without the cyclist ever feeling the moisture.
- Rain During drizzles or even downpours, there is really no reason to seek shelter unless there are thunderstorms. Cycling in the rain is thrilling (and, as an aside, the "casquette" helps a lot with keeping most of it away from glasses). Here tight-fitting clothes and their special fabrics also help significantly. They magically somehow keep one warm.
- Rashes If you've ever ridden a long distance with baggy shorts, you will have noticed inflamed skin where the hems touched you. Lifting then lowering the legs tens of thousands of times will do this. Tight-fitting hems solve the problem.
- Aerodynamics As long as one is riding with a leisurely group at 15-20 km/h, wearing sail-like clothes could sometimes be pleasantly refreshing. But ride over 20 km/h and the clothes will move up your limbs, and the sail-like clothes become irritating, not to mention that they will make it harder for you to keep up with a faster group.
- Fitting in Road cyclists typically do wear tight-fitting lycra. Concerns of lack of modesty quickly disappear with a group, and as a bonus one fits in.
By comparison I see no reason to acquire specialized clothing for MTB, and all the reasons above still apply, except that aerodynamics matters more or less depending on speed, still as with road cycling.
Sports stores are of course happy to tell us that the pockets on tennis shorts make them unsuitable for doubling as soccer shorts.
Can you suggest any advantages to MTB's baggy clothing, besides "fitting in"?
This question has been edited to make its focus distinct from a similar question.